This year, the official start date for filing 2021 income tax returns was Jan. 24, and the season ends on April 18 for most filers. According to the IRS, the typical period for refunds is three weeks or less. Be aware that you can speed up the process by filing electronically and submitting your direct deposit information. Two of the biggest issues related to 2021 returns are likely to be reconciling last year’s stimulus and advance child tax credit payments.1
When it comes to tax season, we’re rather stuck with many of the decisions we made (or failed to make) during 2021. That’s why it can be beneficial to analyze your return this year and see how you might better position your finances, income, payouts and investment trade activity to help minimize your tax burden for next year. If you’d like to discuss various strategies tailored for your circumstances, please contact us for a consultation.
While pursuing strategies that minimize your tax bill is a good idea, false reporting and fraudulent shortcuts are not. The last thing you want is to be audited by the IRS. One thing to note is that the likelihood of getting audited rises significantly as your income increases. However, it’s also interesting that the IRS proactively spreads out its auditing activities across all income brackets to ensure fairness.
With that said, the IRS reports that people who earn $10 million or more tend to have higher audit rates (8.16% from 2010 through 2015) than those in lower-income categories. As a general rule, among taxpayers who earn less than $1 million, less than 1% of filers get audited each year.2
The IRS will generally conduct a tax audit within three years of when a return was filed. Higher-income tax returns can take longer if they are more complex, and they tend to include at least three different tax years. Those returns also are audited by the most highly trained and experienced IRS agents.
On the low-income scale, one of the most common mistakes that triggers an audit involves the refundable earned income tax credit (EITC). Out of the 25 million taxpayers who claim the credit, the IRS audits about 300,000 each year. About 50% of EITC claims are incorrect, which results in more than $17 billion in improper payments each year.3
The following were four of the top 10 IRS audited tax cases in 2021:4
- Two sisters who operated a tax preparation business filed more than 16,000 false tax returns for clients from 2012 to 2016 for a total estimated loss to the IRS of $25 million. They were sentenced to between four and eight years in federal prison.
- A Russian bank founder failed to report large stock gains after his company became a multibillion-dollar, publicly traded company. He had to renounce his U.S. citizenship and pay more than $248 million in back taxes, as well as time-served and one year of supervised release.
- An ex-pastor lured and defrauded investors who thought they were investing money (more than $33 million) to fund church entities. He was sentenced to 14 years in federal prison and ordered to pay $22.66 million in restitution to his victims.
- Another man was convicted for perpetrating a Ponzi scheme involving the sale of thousands of manufactured mobile solar generator units (MSGs) that didn’t exist. He was sentenced to 30 years in federal prison and forfeited $120 million in assets to the U.S. government for victim restitution.
Here’s an interesting tidbit: Any revenues earned from stolen goods and illegal activities should be reported on your tax return. While that rarely happens, people who are being investigated or indicted for illegal activities may want to do so in order to avoid also being prosecuted and fined for tax evasion. In fact, if a convicted felon is required to pay restitution for his or her crimes, those amounts qualify as a deduction.5
Pro Tip: One way to avoid tax fraud is to file early. Once your return is received under your name, it’s harder for a fraudster to succeed at filing a false return using your identity. If a scammer files first, it can take a year or more to rectify the situation with the IRS.6