Accounting On Us
The danger of keeping secrets from your CPA
Information you need to report
Daniel A. Mace, CPA
Secrets don’t make friends, especially when it comes to the IRS. Sitting on important financial information and keeping secrets from your CPA can land you in a heap of trouble. Or, maybe life is just busy and you forgot to tell your accountant about your new bundle of joy. Either way, you’re potentially missing out on tax savings and/or facing mounting penalties and interest. Here’s what you should share with your CPA.
Extra income. Do you have a side business? Any income you earn, no matter how small it is, is potentially taxable and could also lead to tax benefits concerning deductible business expenses. However, you must put it on a timely tax return in order to claim any deductions.
Medical expenses. If you have a large medical expense, you need to tell your CPA because you might get a large deduction. We understand that health information is a private and sensitive topic. We don’t need to know all the details; we just need to know what you paid in qualifying medical expenses.
Investments with tax implications. If you’ve made contributions to an IRA, a Roth IRA or 529 Plan, be sure to tell your CPA because those contributions can help lower your taxable income. People sometimes forget to mention the 529 Plan because you don’t necessarily receive a tax form for those contributions and there isn’t a federal deduction; however, you could potentially get a deduction at the state level.
Gambling income. Did you hit the Mega Millions jackpot? You’re going to need to tell your CPA about that or any other gambling income you have. Nobody wants to give up part of their winnings, but they are taxable.
Foreign financial accounts. The penalties for not disclosing your foreign financial accounts are very steep – potentially $10,000 or 50% of your account balance, whichever is greater.
Rental income. You have to pay taxes on your rental income. Maybe it’s your second home or a room in your primary residence, or it could be your vacation home in Italy (yes, you’re subject to U.S. tax even if your property is in another country).
Life events. Major life events that impact your taxes include:
- Births – You added to your family this year, so don’t forget to add your new dependent to your tax return. You may also be eligible to claim certain tax credits when you have a baby.
- Marriage – If you got married this year, you will need to include some of your spouse’s information on your tax return, even if you’re filing separately.
- Divorce – Be sure to tell your CPA if you and your spouse divorced. You will need to make sure you and your ex are claiming exemptions appropriately if you have dependents.
- Deaths – The death of a spouse is already a very traumatic time, but getting hit with an unexpected tax bill after someone passes away is even worse. You should discuss how your tax situation is going to change since you will no longer be filing a joint tax return.
You’re behind on filing your taxes. If you haven’t filed your taxes in a few years, you need to let your new CPA know about that. You might have a filing requirement or you might be owed a refund, but you won’t see that money until you file your returns. If the IRS owes you money, you only have two years from the time the tax was paid to claim the refund. Unfortunately, the opposite is not true if you owe the IRS. The statute of limitations does not begin to run until you get those delinquent returns filed.
Personal injury lawsuit. Income from a lawsuit is potentially taxable and there’s not always reporting from attorneys or insurance companies. Your CPA needs to know about any settlements you receive so he can determine if they’re taxable. Your CPA may need to see paperwork from the settlement or talk to your attorney.
You can’t afford to pay your taxes. Your CPA can help you set up an installment agreement with the IRS.
Estimated payments. If you didn’t make your estimated payments, paid a different amount than what your CPA recommended or didn’t pay on time, let your CPA know. The IRS reconciles your payments to the amounts on your tax return and will be sending you a bill if the incorrect amounts are reported.
Honesty really is the best policy when it comes to your taxes. If the IRS finds out later that you withheld information or left items off your return by mistake, it will be worse than if you’d just reported everything correctly up front.
Daniel A. Mace, CPA, specializes in providing tax services to small businesses, individuals and nonprofit organizations. You can reach him at (520) 836-8201 or DanM@hhcpa.com.