Don't Mess With Taxes

Image by Maxime Duprez via Twitter

Happy National Pi Day 2021. Or as usurping marketers in the United States also call it Pie Day, even though there is a day designated for the food.

Go ahead, get your bargain-priced sweet or savory pies today. But March 14 actually celebrates the mathematical constant pi, or π in the Greek alphabet. In case it's been a long time since math class, that's the ratio of a circle's circumference to its diameter.

The trillion-digit ratio is rounded to 3.14. You can find more about pi in one of my earlier March 14 blog posts.  

March 14, Pi Day, was when in 2018 the world lost the genius (and courage and wit) of astrophysicist Stephen Hawking. On a happier note, March 14, 1879,  also was the day that theoretical physicist and scientific/cultural icon Albert Einstein was born.

And, of course, the rounding of the never-ending pi number and Einstein reminds me of a tax topic. It also prompts me to award 3.14 this week's By the Numbers honor.

Tracking and tallying tax numbers: Doing taxes is all about the numbers.

The Internal Revenue Service wants us to put on our returns and associated forms myriad Social Security and other identification digits. And those forms onto which their numbers are entered have numerical names.

Then there are the amounts of taxable money we must report. Finally, we can't forget all the adding and subtracting and multiplying and percentage figuring so that we can get to the important amount of all, our final tax bill.

So with Tax Day 2021 (still) just a month +1 day away, Pi Day is the perfect time to look at one aspect of some of those numbers.

I'm talking about rounding fiscal entries.

Round as pie tax numbers: As far as taxes go, the Internal Revenue Service wants us to be accurate, but it also allows us to round our tax return entries.

There are several reasons for this approach.

From Form 1040 instructions (page 22).

Round numbers are easier to add and subtract. Anything that makes any part of doing our taxes easier is welcomed not just all us filers, but also by the agency that must process around 150 or so each year.

Tax software, which most of use to figure our annual tax bills, rounds our entries. It drives obsessive-compulsive folks crazy, but that's just how most of the tax preparation software folks have set up their computerized filing assistance packages.

Even the IRS, in its Form 1040 instructions excerpt there to the left, says that's OK.

So have at it in rounding your tax form entries up or down.

Suspiciously round tax entries: But — you knew there was a but coming; we are talking taxes — don't play fast and loose with your entries when it comes to business expenses.

If every tax deduction or expense in connection with your company ends in 00, it tends to make the IRS think that you're, uh, making up amounts.

OK, I tend to add tip amounts to business meal checks so that that final credit charge comes out to no cents spent. But I have those receipts to prove my even-dollar fixation.

Other financial transactions, however, rarely come to just dollars and no cents. How often, for example, does that tax-deductible drive to meet a client come to exactly 10 miles?

The same is true for all tax-related travel, most of which is noted as itemized deduction claims on Schedule A. This includes the charity-related miles you put on your car as a volunteer deliverer of meals to shut-ins or the trips to the doctor that help push your medical claims over the 7.5 percent threshold.

At the very least, all those rounded numbers on your 1040 and associated forms make it look like you didn't keep good records of the precise deductible amounts.

And that could encourage the IRS to check into your entries and other math. 

Round, but verify: Now I'm not saying don't round entries. Just do so accurately and where appropriate.

And be sure to, as your math teacher used to say, show your detailed tax work if the IRS ever asks.

Now I'm off to run the numbers on how many extra miles I'll need to walk this coming week to offset the pieces of pie, both pizza and pecan, that I plan to enjoy in celebration of Pi Day!

You also might find these items of interest:

• Save space and trees: Digitize your tax records
• 2020 tax return filing checklist and pre-filing tips
• IRS lender transcript troubles highlight importance of keeping good tax records

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