It’s that tax time of year again. As you prepare to file your annual income tax return, consider the following situations that might make you more likely to attract government scrutiny. According to an article published by Forbes, the following is a list of some of the ways that you could be inviting an audit by the Internal Revenue Service.
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Be super wealthy.
The IRS has special “wealth squads” looking at all of the holdings of very affluent people, using the reasonable theory that there is a bigger potential to uncover significant dollars owed.
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Hide offshore accounts.
Foreign bank accounts are not illegal, choosing not to declare them or their income is.
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Be a tax protestor.
Claiming you owe no taxes because income tax is illegal or only applies to peculiar income categories that you don’t have tend to be off the wall theories that will not be likely to prevail.
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Claim huge charitable contributions.
Substantial contributions can make you a target for the IRS, whose rules require complete documentation of your gifts to nonprofits before you file your return.
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Omit some reported income.
The IRS uses reports of your income from third parties, including employer W-2’s and independent contractor, brokerage and bank 1099’s, to match to the amount of income you report.
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Take a big home-based business loss every year.
If you report losses for your Schedule C business in three out of five years, the IRS may require you to produce evidence of a profit motive.
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Claim a loss on a hobby.
Writing off expenses for dog showing, comic book trading or other “business” that cause you to have a loss on what is really a hobby (not pursued for profit) can be a red flag for inquiry by the IRS.
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Use a sleazy tax preparer.
The IRS has stepped up efforts to track tax preparers and shut down those that have proven to be untrustworthy. Once the IRS identifies a problem with a tax preparer, his or her clients can become easy targets.
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Write off unreimbursed employee business expenses.
Since these expenses are only allowed to be deducted if they exceed 2% of your adjusted gross income, the IRS may use a mail audit to request your documentation to be sure it does not include ordinary work clothes or commuting costs that are not deductible.
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Take deductions in round numbers.
Reporting a lot of zeros might cause the IRS to think you don’t have the required backup.
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Make math errors.
The IRS computers are programmed to formulas. Returns with mathematical errors can trigger IRS requests for back-up information.
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Brag a lot.
You never know when someone listening to you may decide to share what you are saying with the government, since there are now laws that require the IRS to pay minimum rewards for tips in cases that result in large collections.
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Anger an ex-business partner, employee or spouse.
This could create a greater possibility of getting the whistle blown on you.
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Make careless mistakes.
Red flags include not signing a return, leaving off your Social Security number, or miswriting it.
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Fail to file on time or not at all.
The IRS has a special program that will generate a return for you using W-2’s and 1099’s.
When asked what she sees as the most dangerous, Julie Welch responded, “not reporting foreign bank accounts and foreign assets is a major focus of the government right now. In addition to reporting the income on your tax return, if you have foreign accounts, the government has several reporting forms you might be required to submit. Failure to do so can result in significant penalties and possibly imprisonment. Also, lack of documentation for deductions – business, charitable, or other – is clearly a big issue if you get audited by the IRS.”
Written by Stephanie L. Drake (stephanie@meara.com), CPA, ABV