Most folks are honest, and all complaints, grudges, and “wasn’t the whole idea of income tax supported to be a temporary thing?” aside, come the spring we open our spreadsheets (or maybe our shoeboxes) and get down to the business of figuring out either how much tax we owe Uncle Sam and his counterparts at the State level, or how much interest-free lending we’ve done over the past 16 months (isn’t that generous of us?).
However, even honest and organized taxpaying citizens are worried about triggering an IRS audit, because even if the ultimate verdict is a clean bill of taxpaying health, it can be a stressful, time consuming and costly process. It’s right up there with getting a root canal, or seeing that glimmer of delight in the eye of your mechanic as he walks towards you after what was supposed to be a simple inspection.
And so, what sets off alarm bells at the IRS when computers and agents plow through millions of tax returns a year? According to Jeffrey B. Kahn, principal and founder of the Law Offices of Jeffrey B. Kahn, here’s what can increase your chances of being flagged for an audit:
- Higher income. As strange and as unfair as it sounds, statistics show that the IRS flags higher income returns (i.e. above $200,000) disproportionate more than lower income returns.
- Unreported income. The IRS’s computers crunch the numbers on W-2s and 1099 forms, and if they don’t add up then there’s a greater chance they’ll have questions.
- Large charitable gifts. While giving to worthy causes is noble, the IRS tends to get suspicious if the amount of donation(s) is disproportionate to income.
- Home office deductions. There’s nothing wrong with these, provided that they’re reasonable, legitimate, and that your home office is used regularly and exclusively as your principal place of business.
- Rental real estate losses. In most cases, deducting rental real estate losses isn’t allowed. But there are a couple of exceptions, such as if you’re a real estate professional. This gets pretty complex and technical, and if you’re attempting to claim any exception, make sure you speak with a tax attorney to confirm that you qualify.
- Travel and entertainment expenses. The IRS has some pretty strict substantiation and record keeping rules around this, and they get skeptical when they see unusually large write-offs.
- Business use of vehicles. As with a home office, this deduction is permitted; provided, of course, that it’s legitimate and within the rules. IRS agents are specially trained to ferret out taxpayer records that don’t add up. They’re also highly skeptical of any claims for 100 percent business use of a vehicle, if another vehicle is not available for personal use.
- Hobby losses. Did that “fish that got away” take your beloved fishing pole with it? Did your nephew accidentally mail away your prized stamp? Unless fishing or stamp collecting is how you make your living, don’t claim these losses.
- Foreign bank accounts. The IRS is aggressively clamping down on taxpayers with offshore accounts. If you have foreign bank accounts, make very sure that you report all income down to the last penny (or whatever currency it’s in).
- Cash businesses. Some businesses tend to conduct more businesses in cash, such as food stands, car washes, and so on. Unfortunately, the IRS is more likely to audit cash-heavy taxpayers. So much for cash being king!
Of course, keep in mind that none of the above should dissuade you (or freak you out) from claiming legitimate tax breaks. Just make sure that your return is accurate, that you have organized records on-hand and ready to submit if required, and that you work with a qualified and experienced tax attorney.
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