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9 Red Flags That Could Get You Audited By the IRS

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Getting audited is not common. In fact, the IRS only audited 1 in 160 individual tax returns in 2018. A decade ago, there was an audit rate of 1 in 90.  Every year, the number of taxpayers audited has been slowly dropping

Cuts at the IRS have resulted in fewer staff members, and, as a result, fewer audits.

The more money you make, the higher the likelihood of being audited. If you’re making north of a $1 million per year, there is a 1 in 25 chance of you being audited.

There’s only a .5 – .6 % chance that you will join the ranks of the audited. The odds are low, but you don’t want to fib or flub your tax return and risk an expensive and time-consuming audit process.  That percentage still puts about 1 million taxpayers on the hook each year. Here are 8 ways you could become one of them.

Claiming Home Office Deductions   

In order to claim home office deductions, you need to ensure that the area you’re dedicating is only used for business.

Claiming a home office deduction means you can prorate some of your household expenses like:

  • Utility bills

  • Homeowner’s association fees

  • And more

This is done on a fractional basis,  based on the percentage of your home that the home office space takes up.

It is also an area that is often abused, which is why claiming home office deductions can be risky business.

Giving a Lot to Charity  

If you’re giving too much to charity, then the IRS will question the validity of your donations. They know how much those who make the same amount you do and giving too much will often signal that something fishy is at play.

Be sure to keep all receipts and records for your charitable donations. It’s recommended to write checks for charitable donations, which are much harder to falsify than other forms of donation.

Using Digital Currencies 

This one is a little newer. The government is looking for those that aren’t reporting income from cryptocurrencies.

Sure, it’s not the US dollar, but the government still wants to know what you’re making from it. Failure to report crypto income could result in worse than an audit, it could lead to a large fine ($250,000) or prison time.

Not Reporting Taxable Income  

This one is simple. Be sure to provide the IRS with every 1099 and W-2 from every job you’ve had this year.

Just because you don’t send one in, doesn’t mean that the IRS doesn’t know about them. A copy of all your tax forms are sent to the IRS, so you can’t just pretend certain jobs didn’t exist.

They’re looking for those participating in businesses that operate in large amounts of cash and those working in the gig economy.

Deducting Entertainment, Meal, and Travel Costs  

You can’t claim entertainment costs on your taxes anymore, so don’t try. You can still deduct travel and meal costs, but you need to be very clear with your records in order to stay in the clear with the IRS. We recommend recording:

  • Amount spent

  • Location

  • A list of those that attended

  • The business purpose of the meeting

Keep receipts for any meal or travel costs that are over $75.

Claiming Losses   

Claiming losses of any kind on your tax ups the chances that you’ll get audited.

Some types of losses include:

  • A business that reports losses for 3 years – this makes the IRS view your business as a hobby

  • Rental losses – Find a tenant that stays and pays

  • Stock market losses

Claiming these types of losses and others could be a red flag that gets your business audited.

Filing a Form 5213  

This form basically tells the IRS to not audit you for the first 5 years of your businesses’ life. It can help you transition from a hobby to a business, but once the 5 year period is up, you’re now under the microscope.

Be aware of this if you have already filed this form or are considering it.

Having Bank Accounts in Other Countries 

It’s not a crime to have bank accounts in other countries, but it is a common tactic for those attempting to hide income from the IRS.

Don’t do it.

If you have foreign bank accounts, be sure to report any that combined have an excess of $10,000+ anytime in the prior year. You can do this electronically or with an IRS Form 8938 if you have an account with far more than $10,000 in them.

Falsifying Tax Form or Making Errors  

If you file your taxes with a preparer that the IRS knows has falsified taxes, you might be on the hook instead of the CPA you hired.

Additionally, basic math errors are another type of issue that could draw the attention of an IRS agent. Use a tax preparing software or a trust tax preparer to negate any of those sorts of issues.

Your chances of being audited are low. But why take the risk? Some of the red flags on this list are unavoidable if you’re filing your taxes properly. Others are completely avoidable.

To cover yourself, hire a tax professional that will not only ensure that your taxes are done properly, but also will represent you if you are one of the million taxpayers that are audited each year.

IRS does sometimes call taxpayers

By Bankrate

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

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The Internal Revenue Service has learned a hard lesson about never saying never.

After years of assuring us that IRS employees never initiate calls to taxpayers, a tax preparer told the National Taxpayer Advocate that one of his clients had indeed received a call from the IRS — the real, live, legitimate IRS — without any prior notice.

That “no call without a letter first” procedure is regularly cited by the IRS, including by Commissioner John Koskinen himself, when alerts are issued in connection with the persistent IRS impersonation telephone tax scam.

As the scam, which the IRS and the Treasury Inspector General for Tax Administration say is the largest ever, expanded, taxpayers were advised to ignore purported phone calls from the IRS in order to protect themselves against tax identity theft and refund fraud.

Now, that warning has been turned upside down — at least a bit.

IRS contact confusion

That actual IRS agents do sometimes call taxpayers unannounced has the tax world buzzing. It also has taxpayers worried about how they now can differentiate between real IRS callers and criminal con artists.

The revelation came at a May 5 public forum in Iowa, one of several that National Taxpayer Advocate Nina Olson is holding across the country.

According to the tax publication Tax Analysts, which first reported the real IRS auditor calls, an Iowa enrolled agent said an IRS employee in the state called one of his clients, an elderly man, without first sending the taxpayer a contact letter.

While Olson expressed surprise at the unannounced IRS phone call, others at the forum said the practice was common, at least in the Hawkeye State.

After the Iowa event, Olson told Tax Analysts that an Omaha, Nebraska-based Taxpayer Advocate Service staffer told her that as far back as a year ago, the Internal Revenue Manual advised revenue agents that the preferred method for initiating taxpayer contact was by phone.

Olson gave the IRS’ occasional first-contact calls the benefit of the doubt, speculating that the IRS manual’s call instruction may be old and not revised to account for the current rash of telephone tax scams.

IRS revises phone call procedure

The IRS itself, however, has had second thoughts about its call-first audit outreach.

In statement issued after the Iowa forum, the IRS detailed the differences between a real auditor’s call and one from tax ID thieves. “Generally, phone scam callers are focused on masquerading as an IRS collection operation and demanding immediate payment of money,” said the IRS statement. “These callers typically are not saying they are contacting taxpayers for an audit.”

The IRS also noted that when a legitimate tax agent conducts an audit, an appointment generally must be scheduled to discuss the case. IRS revenue agents do, in some limited in-person field audits, call first to schedule the initial audit meeting. But during those scheduling calls, a real IRS agent will not ask for payment or personal financial information.

Those call-first instances, however, are over.

“In an abundance of caution and in light of pervasive phone scams seeking to extort money from taxpayers, the IRS has decided to adjust this policy for in-person field exams,” said the IRS in its statement. It now will notify taxpayers in this smaller exam category first by mail that their return has been selected for audit and then contact them to schedule audit appointments.

You, too, can help by remaining skeptical of all purported tax calls. If you are concerned about a call ostensibly from the IRS, hang up and contact the agency directly yourself or have your tax preparer do so.

Don’t worry. The IRS won’t be mad that you broke off the call. In fact, the agency suggests the very same thing.

You also should keep an eye on your personal data and credit reports if you have or suspect you’ve fallen prey to tax identity thieves.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.