11 Tax-Reduction Strategies Which Could Get You Audited
At some point in their lives, most Americans, have probably had some fear of being audited by the IRS. IRS audits are not as common as one would think, since a very low percentage of tax returns are audited in the first place. However, there are some things that you must know to reduce the likelihood of being subject to an audit by the Internal Revenue Service.
When deciding upon which tax returns to audit, the IRS uses a combination of different factors. Many of these can be avoided on behalf of the taxpayer, while others are unavoidable. The following are some of the top factors that will cause the IRS to conduct a tax audit.
The Amount of Your Return
The higher your income bracket, the more likely your chance of being audited. If you earn over $1,000,000 you have a 1-in-10 chance of being audited. Those who earn less than $200K a year are less likely to be audited. . Unfortunately, higher earnings may mean an increased chance of being audited.
Mathematical errors are one of the most common mistakes on IRS tax returns, whether the return is filed on paper or electronically. Ultimately, your tax return is processed by a computer when it reaches the IRS, so it is crucial that you do not have any mathematical mistakes. Regardless if you file on your own, through a tax service, or a personal accountant, it is always a good idea to have someone double-check your return. Make sure your numbers are written legibly and your decimal points are in the correct place. Intentional or not, your mathematical error may lead to IRS penalties and an increased chance of an audit.
Overabundance of Charitable Deductions
Those who make frequent and significant charitable contributions are eligible for big tax deductions. The average taxpayer will claim about 3% of their income as donations to charity. However, you should never falsify this information. While this may seem like common sense, it is often overlooked. Charitable donations that do not line up with your income level may raise suspicion. For example, claiming that you made over $10,000 in donations to various charities, but only have an income of $40,000 may be a red flag.
Overabundance of Business Expenses
You should never take advantage of your business account. All reported expenses should be in conjunction with your line of work. Also, you should not claim your vehicle or home office as 100% on your tax return unless you use that office and/or vehicle exclusively for work purposes. Any discrepancies in this area could lead to an audit.
Owning a Small Business
The IRS pays extra attention to those who file a “Schedule C”, as there has been a past tendency for those who are self-employed to claim an overabundance of deductions as well as not properly disclosing their full income. The IRS closely scrutinizes sole proprietors , so it is imperative that you report all your earnings and claim only proper expenses on your Schedule C.
Typos and Discrepancies
Similar to mathematical errors, a typo or discrepancies on your tax return is a red flag for the IRS. If your numbers don’t match your IRS records, such as address, phone number, etc, it may raise suspicions. You are in fact legally responsible for any and all information on your return. It pays to have someone review and double-check your facts and figures before submitting your tax return to the IRS. You don’t want a slight oversight such as an incorrect Social Security Number or a misplaced decimal to be cause for an audit.
Earned Income Credit
Recently, the IRS has announced that those who claim the Earned Income Credit are more likely to be a subject of a tax audit, as there has been an increase in the amount of frivolous Earned Income Credit claims. Before you claim the Earned Income Credit, read the guidelines provided by the IRS to ensure that you qualify or check with an experienced tax professional.
Unreported Taxable Income
In case you were not aware, the IRS does in fact receive copies of your W-2’s,1099’s, and other similar tax forms from third parties, so it is critical that you report and file all of the proper information and forms to the IRS. Any discrepancies will be an automatic red flag and a probable audit on your behalf.
Claiming a loss on a “hobby”
In order to be able to claim a “hobby” as part of your income, it must be conducted similar to a business and be able to realistically earn a profit. If said hobby generates a profitable income 3 out of 5 consecutive years, it is considered to be taxable income and therefore must be claimed. You may deduct any expenses up to that level of income; however, you are prohibited from writing off losses from the hobby.
Failure to report foreign bank accounts
Neglecting to report any and all foreign bank accounts is cause for an audit and can lead to heavy penalties and severe consequences. Foreign accounts must be reported by electronically filing “FinCEN Form 114” for any account that had a balance greater than $10,000 duringthe prior tax year.
Failing to Claim Winnings from Trading or Gambling
To qualify as a trader and be able to claim this on your return, you must be actively engaged in continuous trade. There are many guidelines set in place by the IRS that pertain to both investing and day-trading and you must be sure that you are in direct compliance with these regulations and that you claim and properly file all earnings.
As well, if you do not claim your gambling income on your return, you could be risking an audit. Failure to report even recreational earnings from gambling can catch the attention of the IRS. Only those who are professional gamblers may deduct the cost of meals, lodging and other such expenses. As with day trading and long-term investments, you must be fully aware of the regulations set in place by the IRS regarding earnings from gambling or trading, and so on.
Should you have any questions regarding your tax return or an IRS audit you are currently facing, contact Landmark Tax Group for a Free Consultation with our tax resolution specialists and former IRS Agents. Call us at (714) 382-6780.