12 Tax Audit Red Flags!

28 March 2013 / Uncategorized / Comments Off on 12 Tax Audit Red Flags!

Certain things can increase your likelihood of an audit.  These are called "Red Flags".  They should be avoided, if possible, because an audit is an unpleasant and costly thing to live through.

Foreign Assets

Stashing money overseas? Then you're probably well aware that the IRS has been ramping up its efforts to rein in offshore accounts. Launched in 2009, the agency's voluntary disclosure program has already raked in more than $5 billion in back taxes, interest and penalties from tax cheats for illegally hiding assets in offshore accounts.

Taxpayers are asked to check a box on Schedule B if they have an ownership interest in foreign accounts. If they then fail to provide information about those assets, it will undoubtedly trigger an audit.

Indicating on your return that you do business in foreign countries or take many trips abroad for work could also raise eyebrows if no foreign assets are reported. And the penalties for hiding offshore accounts are huge, including a fine of $100,000 or 50% of the balance -- whichever amount is greater -- for accounts that are willfully undisclosed.

 Divorced with an angry EX!

Following messy divorces, many ex-spouses will go to great lengths to get revenge -- some will even try to wreak havoc on your reputation by contacting the IRS.  In years past, people have told the IRS that their ex-spouse laundered money, committed serious financial crimes, underreported income, even owned a brothel. Ex-spouses apparently love writing letters to the IRS.

Sometimes the claims are completely made up, while others are legitimate. And while some people write in anonymously, others divulge their names, which is required in order to claim a whistleblower reward of 15% to 30% of any extra money collected as a result of their tip.

Too many zeroes!

While rounding numbers on your tax return to the nearest dollar is okay, rounding to the nearest thousand is not -- especially when itemizing deductions like business expenses, unreimbursed employee expenses and job hunting costs.

If you submit figures like $5,000 in travel, $2,000 in auto expenses and $4,000 in meals and entertainment, it may look like you pulled those numbers out of thin air or inflated them by rounding -- since it's unlikely that every single expense was a perfect multiple of $1,000.

Home Office

After years of watching people abuse the home-office deduction, the IRS is on the look-out. In order to avoid being scrutinized, make sure you only claim reasonable expenses -- and only those that directly apply to the part of the home used as an office.

And just because you do some work on your couch while watching TV doesn't mean it qualifies as a home office.  The credit can only be claimed if the home office is your primary place of business and is used exclusively for work. People get into trouble when the IRS suspects they are mixing personal costs with their business costs.

Forgetting Income

For people who earn money from various places, remembering to report every single cent can be difficult. But 'I forgot' isn't a legitimate excuse to the IRS.

For any miscellaneous income over $600 you received throughout the year, the company you worked for should send you a Form 1099.  If you don't receive it for some reason -- it was mistakenly sent to a previous address, for instance -- you should assume that the IRS will still get it.  You can either request the missing form be replaced or simply report the income without the form. This is why it is important to track your income throughout the year.

Of course, some people earn money that may not get reported on 1099s -- like side money made giving people haircuts. Even if the IRS doesn't know about it, you must report this income as well or you risk the agency finding out and nailing you for tax evasion.

Questionable Deductions

Sometimes claiming a tax deduction you know is a stretch just isn't worth the risk of an audit. One of the most common gambles: Writing off a swimming pool or Jacuzzi for medical reasons.

Just because your back hurts doesn't make your pool or Jacuzzi deductible.

To qualify, you must be able to prove that you purchased the pool or Jacuzzi solely to help with the treatment of a verifiable medical condition and this remains its primary purpose. If you don't have a doctor's prescription requiring the use of a pool or Jacuzzi, the deduction likely won't be allowed and it may lead the IRS to take another look at the rest of your return as well.

Being Rich

Not only do high-income taxpayers have more complicated returns, but they bring in much more revenue for the IRS with each mistake they make.  While only 1% of the overall population gets audited, the odds jump to 21% for taxpayers with income over $5 million and to 30% for those earning $10 million or more, according to the most recent statistics from the IRS.

Even if you're not rich but live in a wealthy neighborhood, your return could raise questions about how you can afford to live there -- especially if you report surprisingly low income or a big business loss.

Saying the wrong thing

Watch what you say and who you say it to. Even if you're joking, you never know when a friend or neighbor will decide to rat on you. Talking with the press about personal or business information or making a public statement that doesn't match the information you provide to the IRS can also get you in trouble.  If a newspaper publishes a profile of your business in which you gloat about surging profits but you then post big losses on your tax returns, the IRS may start digging into your file.

Celebrities have to be extra cautious. The New York State Department of Taxation went after baseball player Derek Jeter for state income tax, citing public statements he made "professing his love for New York" as part of its argument, according to legal documents from the state agency. That gave the agency enough of a reason to allege the baseball star was a resident of New York (not Florida, as he claimed).

And who can forget Richard Hatch?  The very first winner of $1,000,000 on the television show “Survivor”.  When that income did not show up on his return, the IRS investigated him and sent him to prison.

Wesley Snipes is supposed to get out of prison this year, having served his sentence for tax evasion.

A LOT of driving for work

With gas prices so high, who wouldn't want to write off all of their driving costs? But unfortunately, you can only deduct gas costs if the driving you did was for business purposes.

The key to winning this fight with the IRS is to keep a mileage log and track your business miles by indicated where you drove, the miles (round trip, of course) and the business purpose for the trip.

Exaggerated donations

Even good deeds can spark suspicion at the IRS. If you report extremely high charitable contributions -- especially relative to your income -- make sure you have the proof to back it up.

Receipts for cash donations of more than $250 are required in the event the IRS comes knocking.

Donating items gets a little trickier; because it's common for people to think the items are worth a lot more than someone will actually pay for them. So it's important to be reasonable with your valuations.

Business Losses

If you own a business that is reporting losses year after year, the IRS may grow suspicious that it's actually a hobby. There's a rule-of-thumb saying you must have a profit in two out of five years -- if you don't have a profit the presumption is that you are not engaging in that activity to make a profit, thus is can be considered a hobby. The presumption can be rebutted but it’s difficult.

Using a “shady” tax preparer

If your tax preparer tries to convince you to claim deductions that sound too good to be true or to report income that doesn't line up with what you would have reported, watch out.

You want a preparer that will get you the best refund possible -- but not if it means breaking the law.

The IRS also recommends avoiding tax preparers who calculate their fees as a portion of a taxpayer's refund or promise taxpayers unattainable refunds.


That last one kills us!  We here are Widget have the experience and education to know the law.  We also know when it's worth pushing into the grey areas of the law and when to avoid the black.  If we can assist you in avoiding, defending or living through an audit, please give us a ring.

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