Does tax season give you a headache? Check out these tips for Realtors®

Tax season is not that far away, and as a Realtor®, it can be difficult to keep track of everything.

Sandy Botkin, CPA, Esq., recently offered Taxbot some tips on keeping track of your taxes and how to make the process as easy as possible. Tax season doesn’t have to be a headache, said Botkin. Here are five tax tips that will make tax season a lot less stressful for agents.

1. Assume that you will be audited every year. Although audits have been greatly reduced as a result of IRS budget cuts, as a self-employed person you have a higher chance of being audited than that of an employee. If you assume that you will be audited each year when you both prepare and file your tax return, you will be prepared if the IRS comes knocking at your door. At least, you won’t have to take an extended vacation to Argentina. Thus, make sure that you have receipts for everything noted on the tax return. Also, make sure that you have picked up all of your income; especially the income reported to you and the IRS on the 1099s that you get from your broker, bank, and corporations. IRS matches the income reported to them with your return. Leaving out income is a great way to be invited for a chat.
2. ALWAYS file your tax return electronically or use a tracking service to send your tax return to the IRS. When IRS doesn’t get a tax return from you, it sends a big red flag for them to inquire what happened. This is like putting a big red flag in front of a bull (and you don’t want to be gored). Thus, I strongly recommend you either send your return electronically (which is the best way), or send your return using either Federal Express or UPS tracking. I have seen cases where the courts will waive penalties when the taxpayer can prove that they sent the return to the right address, even if it wasn’t received by the government.
3. Always check that you signed your tax return and have the correct forms attached. It is amazing how many people fail to sign their tax return or don’t file the correct forms. These are two of the top red flags for an audit according to the IRS. Failing to report all of your income is a third major flag too.
4. Attach a schedule explaining big-ticket items. You are allowed to attach a schedule or statement explaining anything on your tax return. This could greatly reduce your chance of an audit. Here is an example. There was a couple who claimed $25,000 worth of dental expenses as a medical expense deduction. Sounds high, right? It caused an audit. What if I told you that this bill was for braces for their three kids and dental implants by a dental surgeon for both spouses? It doesn’t sound as bad, does it? Had this couple attached a statement showing the services that comprised the $25,000 of dental expenses, with an itemization of these expenses, they probably wouldn’t have been audited.
5. Absolutely get a tax tracker. Many times I get asked what self-employed people and employees who need to account for their expenses can do in order to bullet proof their tax return from the IRS and state. The answer according to the IRS is to have a tax tracker. A tax tracking system which can be a written log associated with paper receipts and documentation or it can be in the form of an application found on smart phones that should have the following:

• A mileage log integrated with a GPS system. It would be best if the tracker automatically turns itself on and off when you make a business stop so that you don’t forget to turn it on. It should show both the business and personal mileage and the address of each stop including an explanation for each business stop. Simply noting that a stop was for business or personal isn’t enough and is NOT tax compliant.
• It should have an expense log showing all of the tax questions required for the deductions. Simply showing the amount and place of the entertainment isn’t enough. For example, entertainment should show:
  • Who was entertained?
  • What type of entertainment was involved (business gift, meals, etc.)?
  • What was discussed with some degree of specificity?
  • When was the date of the entertainment and business discussion?
  • Where did the entertainment occur?
  • How much was the entertainment?
• A good tracker should also have an integrated camera for you to take pictures of receipts. IRS and most state tax authorities will accept digitized documentation especially after seeing all of the lost records due to Hurricane Sandy.
• A good tax tracker should have a variety of education for tax planning and compliance. Knowledge can be crucial in the tax area where one idea can save you thousands. In fact, we have seen that simply keeping track of your expenses can save thousands of otherwise lost deductions.
• Finally, a good tax tracker should have easily accessible reports that you can send to your accountant via email or by a memory stick.