How to avoid a tax audit

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Well, folks, it’s tax time again. My Tax Aide volunteering stint will begin next week.

Here’s a good article on tax audit triggers.

The most important piece of advice (apart from using your correct name, social security number and filing status) is to be sure that every number on a 1099 is the same as the number on your tax return. Discrepancies are flagged by computer.

The trickiest situation is reporting income from bonds. The 1099-B (Proceeds from Broker and Barter Exchange Transactions) has a Column 1f which is Accrued Market Discount. This needs to be subtracted from Capital Gains and added as Interest even though it isn’t reported on a Form 1099-INT. Accrued Interest Paid on Purchases (of bonds) isn’t reported to the IRS at all but should be subtracted from the bond interest reported on 1099-INT. When in doubt, attach an explanatory note to your tax return in case the computer flags it for human oversight.

Or you could just give your financial paperwork to a professional tax preparer. Tax Aide is designed for elderly and working class taxpayers and unusual stuff and high income earners are “out of scope.”

Wendy

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Is this because the accrued interest paid acts like an interest expense?

Just wondering how to think about this within some kind of “category.”

Thanks!

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Wendy,

Is that all bonds or tax free bonds?

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That’s all bonds.
Wendy

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Yes, that’s right.

Let’s say that you buy a bond that will pay $100 interest every six months. You buy it between the interest dates, let’s say 3 months before the next interest date. The bond owner would have received $50 in accrued interest but he sold the bond to you. As the new owner, you will receive $100 on the interest date but you paid the previous owner $50 for the accrued interest.

Your 1099-INT will say $100 but you only received $50 because you paid the previous owner $50. But that’s not reported on the 1099-INT. It’s in the fine print buried in the brokerage statement. That’s why the new owner should deduct that from the interest reported on the 1099-INT.

Wendy

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