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14 Tax Audit Triggers

14 Tax Audit Triggers

According to Kiplinger's, here are the top 14 things that can trigger an audit:

•         Making too much money—although the overall individual audit rate is only about one in 100, the odds increase dramatically as your income goes up. Recent statistics show that people with incomes of $200,000 or higher had an audit rate of 3.7%. Report $1 million or more of income? There’s a one-in-eight chance your return will be audited.

•         Failing to report all taxable income—the IRS gets copies of all 1099s and W-2s you receive, so make sure you report this income. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn’t yours or listing incorrect income, get the issuer to file a correct form with the IRS.

•         Taking large charitable deductions—we all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

•         Claiming day-trading losses on Schedule C—those who trade in stocks and securities have significant tax advantages compared with investors. The expenses of traders are fully deductible and traders’ profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are fully deductible and aren’t subject to the $3,000 cap on capital losses.

•         Claiming rental losses—the IRS is actively scrutinizing rental real estate losses, especially those written off by taxpayers claiming to be real estate pros and whose W-2 forms or other businesses show lots of income. The rules require you to spend more than 50% of your working hours and 750 or more hours each year participating in real estate to write of losses without limitation.

•         Deducting business meals, travel and entertainment—Schedule C is a treasure trove of tax deductions for self-employeds. But it’s also a gold mine for IRS agents who know that self-employeds sometimes claim excessive deductions. Big deductions for meals, travel and entertainment are always ripe for audit.

•         Claiming 100% business use of a vehicle—when you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents, so make sure you keep detailed mileage logs.

•         Writing off a loss for a hobby activity—you must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. To claim a loss, your activity must be entered into and conducted with the reasonable expectation of making a profit.

•         Claiming the home office deduction—the IRS is drawn to returns that claim home office write-offs because it has found great success knocking down the deduction and driving up the amount of tax collected for the government.

•         Taking an alimony deduction—alimony paid by cash or check is deductible to the payer and taxable to the recipient, provided certain requirements are met. The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off don’t always satisfy the requirements.

•         Running a small business—small business owners in cash-intensive businesses—think taxis, car washes, hair salons and the like—are a tempting target for IRS auditors. Experience shows those who receive primarily cash are less likely to accurately report all of their taxable income.

•         Failing to report a foreign bank account—the IRS is intensely interested in people with money stashed outside the US, especially those in tax havens, and tax authorities have had success getting foreign banks to disclose account information. The IRS has also used voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean—in exchange for reduced penalties.

•         Engaging in currency transactions—the IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. So if you make large cash purchases or deposits, be prepared for IRS scrutiny.

•         Taking higher-than-average deductions—if deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don’t be afraid to claim it.

 

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