IRS RED FLAGS
Tax season is here once again and millions of Americans are getting ready to do there taxes. A lot of people happily receive a refund check in the mail during this time period, but there’s always a few who aren’t so lucky. The Internal Revenue Service (IRS) decides that your tax refund needs to be audited for any potential mistakes. This is not an enjoyable process for anyone, so here are some great ways for avoiding an IRS audit.
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Math errors- The IRS will automatically correct some of the mathematical errors on your form, but if you have a lot of mathematical mistakes on your tax return, the IRS might flag it for an audit. Be sure to go through your math at least three times if you are filing on paper.
- Limit Itemized Deductions – Itemize deductions are ok, but if you are making large deductions that seem irregular to someone of your income, you are painting a target on your self for the IRS. IMPORTANT! always keep records of all donations and any other itemized deductions.
- Over 1 million Americans each year forget to sign their income tax return! Always sign and date your return before mailing it out. Technically, no signature on your tax return means you didn’t file it, always check twice to make sure that you signed your tax forms.
- Returns that are filed without the necessary supporting tax return schedules
- Unrealistic figures (such as frequent occurrence of rounded numbers) When you round off numbers for your deductions, the IRS believes that you are estimating those numbers and are probably inaccurate. Use the exact numbers that you have so the IRS.
- Major, not easily explainable, changes in comparison with prior tax returns
- The IRS knows that a lots small businesses often create “business expenses” to lower their tax liability. Be sure that you can substantiate any business expense that you list on your tax form.
- Certain occupations where payments are commonly made in cash (for example hairdressers)
- Non-incorporated businesses reported on a Schedule C (Large amounts of income make this even more of a target)
- Home office expenses shown on Form 8829. Filing for a home office deduction is a major red flag to the IRS. Basically you can deduct the expenses of whatever portion of your home is a home office, but don’t bother taking it. You really won’t get much of anything back from the deduction, and it’s a major red flag.
- Interest or dividend income that does not agree with 1099 amounts submitted to the IRS
- High mortgage interest in relationship to income
- Travel and entertainment expenses that exceed the industry norm
- High damage or theft loss deductions
- Low S Corporation shareholder salaries in relation to other distributions
- Business losses several years in a row
- Deductions for "independent contractors" (versus employees) on business returns
- Use of offshore trusts or credit cards
