Internal Revenue Service is not welcomed. However, you need to back your tax return up even if you are generous with calculations.
“For individuals, it usually comes down to being overly aggressive with tax deductions or benefits that could invite the IRS in”
You will receive request in most cases for information if your return is subject to review.
Seven in 10 of return examinations related to agency were conducted by correspondence in tax year 2017.
Respond quickly with documentation agency requests if you receive a notice from IRS such as bank statements or letters from charities.
“If you’re not responding or not giving what the IRS feels is adequate documentation, then it could become a full-fledged audit”
Certain deductions can’t be fudged without IRS’ eyebrows are risen. Information are received by IRS on mortgage interest you paid which can’t be inflated. Charitable contributions overstate since IRS doesn’t receive documentation of your donations from charities.
However, agency use statistical algorithms to be sure that deductions are in line with total income. IRS request documentation if they’re too high to back claims up.
- Missing income
If you forget including income from contract work. W-2 & 1099 forms will be sent to IRS from companies you worked for.
Return will be flagged for review if data doesn’t line up after matching information against tax return.
You have foreign accounts
If you own foreign financial account as brokerage, mutual fund or bank account you need to report it to IRS while filing tax.
Form 8938 must be filed for single taxpayers if total value of foreign assets is more than $100,000 for joint filers or more than$150,000 for joint filers during tax year.
You will receive fine of $10,000 if you failed to do this within 90 days after receiving a notice from IRS in addition to assessed an additional $10,000 up to $50,000 for each 30-day delay.
Earning a lot of money
“Simply earning a lot of money can be a red flag for an audit”
IRS examined 0.5% of all individual returns for 2017 tax year. Examination rate increased 4.4% for individual returns with $1 million, 0.8% for non-business filers reporting $200,000 to $999,999 in income.
“Once you cross that $1 million income threshold, your tax return is more complex. There are more places for the IRS to poke holes in”
Inflated business expenses
When it comes to deductions on Schedule C & reporting business income, there will be much wiggle room makes it easy to inflate or information to your benefit.
IRS looks for:
- Reporting round numbers for expense values & income
- Reporting a business loss for many consecutive years
- More deductions than profits
- Writing off 100% of an item as a business expense which is used personally, as a car or cell phone
IRS scrutinizes cash businesses as bars, taxis, restaurants & hair salons along with those in sharing gig economy as Lyft drivers or Uber.
“If the IRS has reason to believe you aren’t being truthful, they will start questioning things”
Wrongly claiming a child
Claiming that child as a dependent is not available if you don’t file taxes with other parent your child.
This become confusing if relatives or a grandparent helps support the child. This is trigger an IRS review if same dependent is claimed twice.
Child must be younger than 19 living with six months of year. “Tie breaker rules” are used in IRS Publication 501 to configure out who claims child.
- Rental losses
Special rules allow deducting rental real estate losses against regular income.
You are able to deduct up to $25,000 in losses if you participate actively in renting property if income exceeds $100,000 vanishing when it reaches $150,000.
You can write losses off considering a real estate professional who spends half of working time besides 750 hours annually in real estate.
IRS take a microscope to your return if you claim you are a real estate pro.