With the tax season approaching, many taxpayers may inadvertently cross the tax red line due to misconceptions like “thinking they don’t need to file,” “hearing from friends they can deduct,” or “feeling it’s close enough,” resulting in consequences ranging from simply paying back taxes with interest to receiving a letter of audit from the Internal Revenue Service (IRS) or even triggering further tax audits.
Accountant Liu Xinjie in Southern California emphasized in an exclusive interview with Dajiyuan that most tax issues are not intentional tax evasion but rather arise from incorrect reporting, improper deductions, or income omission. She warned that the IRS now employs highly systematic data matching, not solely relying on human surveillance but on cross-checking data. Any anomalies in the data may flag a high-risk case.
Here are some common pitfalls during the tax season that are easily identified by the IRS system, providing taxpayers with self-examination points:
Many individuals engaging in cash transactions such as offline services, small businesses, purchasing agents, or freelancers may mistakenly believe “cash transactions go unreported.” Liu Xinjie pointed out that when cash is deposited into a bank or used for significant purchases and is noticeably inconsistent with reported income, it could attract IRS attention. She emphasized that cash income is also taxable and should be reported on Schedule C.
Many taxpayers may over-declare expenses through Schedule C, leading to sustained losses in side businesses over the years. Liu Xinjie explained that the IRS evaluates whether there is a “profit motive.” If deemed a hobby rather than a business, related expenses may not be deductible, potentially requiring back taxes.
Thinking “if I didn’t receive a 1099, I don’t need to report,” is one of the most common errors. Liu Xinjie clarified that the 1099 is for informational reporting, and even if the form was not received, as long as it constitutes taxable income, it still needs to be reported.
Forms such as 1099-INT and 1099-DIV provided by banks and brokerages are also reported to the IRS. Liu Xinjie cautioned that even if the interest amount is small, any failure to report could easily be detected by the system.
There is a higher risk of calculation errors in property transactions due to the substantial transaction amounts. Renovation costs, transfer fees need proper documentation; and if the property was previously rented, depreciation recapture should not be overlooked.
Liu Xinjie mentioned that cryptocurrencies have become a focus of IRS oversight. Income from digital asset transactions, such as coin-to-coin trades, spending coins, staking, or mining, may all constitute taxable events.
This falls under high scrutiny. She reminded that it must be a “dedicated space” used only by self-employed or business operators, and any unreasonable proportion can easily raise suspicion.
If all expenses related to dining, travel, vehicles, and communication are classified as business use without proper documentation or a reasonable ratio, the risk is extremely high. Self-employment expenses must adhere to the “ordinary and necessary” principle.
Misuse of the head of household status is one of the most common errors. Selecting the wrong status not only affects tax rates and refunds but can also lead to disputes over dependent eligibility.
The reporting of overseas accounts depends on “whether there is a reporting obligation,” regardless of whether there is income. Liu Xinjie warned that FBAR and Form 8938 are high-penalty items, so one should not harbor any illusions.
Deducting vehicle expenses without a mileage log is challenging to defend. Liu Xinjie reminded that mileage and actual cost methods should not be mixed, and the private and business use ratio must be reasonable.
Liu Xinjie emphasized that the IRS will detect anomalies in data through the system. “Filing taxes is not about luck but about logic and evidence.” She suggested that before filing taxes, individuals should first check if they fall into the above pitfalls, seek professional help when needed, to reduce risks and file taxes with peace of mind within legal compliance. ◇