15 WAYS TO INVITE A TAX AUDIT
The IRS has been ratcheting up audits of taxpayers. Of course there’s no reason to pay more tax than is legally required. But consider what situations might make you more likely to invite government scrutiny at tax time.
1) FAIL TO FILE TAX ON TIME: The IRS has a special program that will generate a substitute W-2 and 1099 paper work. Don’t expect it to allow your deductions
2) MAKE CARELESS MISTAKES: These can include not signing a return, leaving out your social security number or miswriting it. All these are red flags.
3) ANGER AN EX-BUSINESS PARTNER, SPOUSE OR EMPLOYEE: They might blow the whistle on you too. And it’s possible they might do it not just for the informant’s bounty.
4) BRAG A LOT: Law requires IRS to pay minimum rewards for tips in cases that result in big collections. The neighbor over hearing your expensive claims may become a government informant.
5) MATH ERRORS: IRS computers are programmed to check your math. Returns with errors can invite scrutiny that might trigger more IRS requests for back up information.
6) TAKE DEDUCTIONS IN ROUND NUMBERS: The world is an even place. If you file a tax return taking deductions ending with lots of zeroes, the IRS might think you don’t have the backup paper work. You risk an audit by mail.
7) WRITE OFF BIG UN REIMBURSED EMPLOYEE EXPENSES: They are only deductible beyond 2% of Adjusted Gross Income (AGI). The IRS might use a by-mail audit to request for backup paper work, thinking you are trying to write off ordinary work clothes commuting costs and other not allowed items.
8)USE A SLEAZY TAX PREPARER: The IRS efforts to regulate all paid tax preparers were just shot down by a federal judge. But that does not stop its ongoing campaign to ferret out and shut down the sleazy ones. When the feds get onto a tax pro playing fast and loose, his or her clients become easy targets.
9) CLAIM A LOSS ON A HOBBY: By definition a hobby is not pursued for profit. But that does not stop some tax payers to claim expenses for their dog showing, comic book trading and “other business”
10) TAKING A BIG HOME BASED BUSINESS LOSS EVERY YEAR: The IRS presumes that a schedule C business losing money three years out of five is not necessarily all but legitimate. You might have to produce evidence of a profit motive.
11) OMIT SOME REPORTED INCOME: IRS computers are very good at matching all the little pieces of paper you get reporting your income with what you put on form 1040. The papers include employees W-2's, contractors, brokerage and bank 1099's.
12) CLAIM HUGE CHARITABLE CONTRIBUTIONS: Rules require complete before-you-file documentation of your gifts to non-profits. The IRS’ use of correspondence audits in which it demand you send in documents backing up various deductions, makes claims for substantial contributions a tempting target.
13) BE A TAX PROTESTER: The IRS does not like it when you claim you owe no taxes because the income tax is illegal or only applies to weird income categories which do not apply to you. Such wacky theories landed actor Wesley Snipes in jail.
14) HIDE OFFSHORE ACCOUNTS: It’s not illegal for US tax payers to have accounts in Switzerland, Hong Kong or some Caribbean Islands. It’s only illegal not to declare them or their income.
15) BE SUPER WEALTHY: This may seem like a “duh” moment, but finally the IRS is increasing the percentage of really rich people it audits on the reasonable theory that there is much more potential to in millions of dollars owed. It even has special wealth squads looking at all their holdings.