Are you sitting there afraid of getting audited by the IRS? The chances are very slim, as last year the IRS audited less than 1% of tax returns in 2017, and experts estimate this year to have even fewer. Certain things, such as owning a business or earning in the top percentile of people, puts you at a higher risk of an audit, but there are other aspects that might lead to the IRS flagging your account. Then you not only want to ensure that you make all your calculations correctly, you also want to avoid these five red flags.
It is important to note that a lot of the audits that occur each year are selected by random. The initial step is a computer comparison to other returns that those in a similar category submitted to see if there are any abnormalities. If they find something of note, they will undergo a more thorough audit. You may also have additional screening because you are linked in someway to a person or business undergoing an audit. Just remember to not panic just because you are flagged for an audit. They IRS just may want additional scrutiny, but that does not mean they will find an issue. In fact, of the 1.1 examinations that the IRS did of tax returns in 2017, almost 34,000 ended up with a higher tax refund! The IRS sends all audit notices through the mail, and they have up to three years to conduct an audit on a return.
Excessive Business Expenses
With the upcoming changes regarding deducting business expenses, it is tempting to try to include as many as possible on your 2017 tax return. However, this is an easy way to get pegged for an audit. Under the previous tax code, which includes your 2017 return, you were able to deduct any reimbursed business expenses as an employee up to 2% of your adjusted gross income. Do not try to maximize this to the point that you end up trying to expense purchases that are only tangentially business-related.
When you file your tax return, include your business expenses to take advantage of the deductions while they still exist. However, make sure that you have a good paper trail in your records to back up the expense. It helps to also avoid turning all of your late-night dinners or entertainment activities that blur the line between business and pleasure into business expenses just to take advantage of the law.
Losses on Hobbies
Did you know that you can deduct expenses on a hobby if you make money off of it? In fact, if you make money, you have to claim the income. Luckily, you can use expenses to help reduce your tax liability. Unlike a business, however, you can only deduct expenses up to the amount of the income that you generated. You cannot deduce any expenses beyond that income like you can for businesses.
For example, if you paint on the side and sell your artwork, you can claim the expenses of your canvases and paints, to a point. If you paid $1,000 for supplies but only made $700, you can only claim $700. If you want to start claiming your losses, or you expect to make profits through your hobby for an extended period of time, start treating it as a business instead to save some of the stress.
Early Retirement Withdrawals
Many retirement accounts have penalties if you take out an early payment. Generally, you must be at least 59 and a half to start taking out the funds. Sometimes, you just need to dip into your nest egg. Just make sure that you know how to properly report that on your tax returns. This is a common area for errors, so the IRS flags it when it happens.
A Lot of Charitable Contributions
With the new tax reform bill, charitable deductions are going to the wayside. This has led to many people upping their donations to take advantage while they can. Although this can really help you, and provide benefits to those in need, you need to be aware of how charitable you are being. Excessive payments compared to your income to charity will lead to a flag, and the IRS will want to find proof to back up your donations. If you do choose to give more than it seems you could, make sure to have the paperwork.
High Deductions for Income Status
In addition to charitable donations, you have other potential areas for deductions, for which many 2017 is the last year. The new tax bill does away with several deductions and increases the standard deduction. This can also be tempting to maximize your deductions for this year. However, the IRS has an average number of deductions for each income brackets. If you start to have deductions for amounts significantly higher than that, then you may find that your return gets flagged as a potential problem.
Perhaps you have a high student loan interest deduction, mortgage payment deduction, or other deductions but you have a really low income. The IRS will want to take an extra look to see what is going on, so make sure that you handle everything properly if you do legitimately have the claim to these deductions.
If you take the time to properly calculate your income, deductions, and credits and have the paperwork to back it up, even if you get flagged for an audit, you should not have an excessive problem. You might find that the IRS calculates things slightly different, leaving you with a tax bill. Or, you may find that they calculate things more in your favor, leaving you with a refund. If you ensure you have done everything to the best of your ability, any tax due will not be as high as if you actually make a mistake or take a credit or deduction for which you are not qualified, lie as to the number of expenses you claim, forget to report sources of income, or otherwise make a mistake on your tax return.
If you do find yourself with a letter from the IRS saying you are being audited, you want to ensure you have the right defense to reduce your risk of excessive penalties, which could lead to collective action including liens and levies. Contact DMG Tax Relief to talk with our tax professionals. We will discuss your situation and see if you are candidate for our tax audit representative. We can also help you with your tax debt, finding the right tax relief program for you. Call us today at 877-808-6200.