Yesterday we illustrated how inaccurate returns or returns with missing data could result in an audit notice from the IRS. Here are some more red flags:
How Income Is Earned
If you work in a businesses where lots of unreported cash changes hands–such as salons or restaurants–your return may attract closer scrutiny from the IRS.
If you are paid in cash or earn base wages plus cash tips, be sure to report ALL earnings: cash, tips, base wages, bonuses…any and all earnings.
In fact, that’s a good rule of thumb for all industries, but cash-based industries in general attract closer IRS scrutiny.
Broke Girls…and Guys
Strangely enough, taxpayers who earn $25,000 or less have a slightly higher chance of being flagged for an audit. Most of this is due to the Earned Income Tax Credit. This stems from a high error rate in calculating the credit, as well as from dishonest taxpayers who wrongfully claim this credit. When in doubt, have your taxes filed by a tax prep pro. They stay current on IRS regulations and tax laws so you won’t have to.
High Charitable Donations
The IRS thrives on statistical data, and their access to billions of records gives them the opportunity to flag any records that are outside the norm for taxpayers in each bracket.
This includes charitable donations; if your cash donations are outside the statistical norm for your tax bracket, the IRS might show some additional interest in your return.
Keep all of your receipts for every cash and non-cash donation that you make. File form 8323 for donations over $500.00. The IRS won’t penalize an honest taxpayer who was generous with their donations, but they will penalize someone who tried to claim a charitable contribution that never existed.
Claiming Losses On a Hobby
By definition a hobby is an activity that isn’t pursued for profit. Shady taxpayers will try to write off hobby-related expenses as losses. It may be tempting–some hobbies are expensive–but don’t do it. That loss from trading/selling vintage gaming systems or comics may have hurt your bottom line, but as far as the IRS is concerned, it’s a hobby.
Foreign Bank Accounts
If you have foreign bank accounts totaling more than $10,000, you MUST report them on your tax return. Not doing so can set you up for stiff penalties and a possible audit. Your tax pro can electronically file the FinCEN form 114 on your behalf at tax time. If you have a generous amount of foreign assets, your tax pro will also need to include form 8938.
Tomorrow, we will take a look at yet more audit triggers and red flags. The IRS isn’t out to “get” honest taxpayers, but they have zero tolerance for dishonest taxpayers. Only an audit can help them distinguish someone trying to game the system vs. an honest mistake by a rookie taxpayer.