TAX AUDIT CONCERNS (OR JUST USE CAUTION)
We just read in The Kiplinger Tax letter that the 2013 individual audit rate was one of every 104 1040s and they expect this amount to sink even lower as the IRS' resources continue to shrink due to budget cuts and reassigning agents to identity theft cases. Millionaires seemed to get the most scrutiny (1 out of every 9); those with incomes $200,000 to $1,000,000 saw 1 out of 37 and those UNDER $200,000 1 out of every 113.
Still, there are areas of concern, some even "red flags", that we, and other seasoned tax pundits, have seen that can only enhance your chances of being audited. Here's how to increase your odds of IRS scrutiny (which does NOT mean you should necessarily shy away from deducting well supported and documented deductions).... sort of an "Abo hit list" of what we've noted could even result in "tax audit red flags". This isn't to say that you should be afraid to make honest deductions on your tax return or shy away from credits for which you qualify in order to avoid the IRS. If you qualify for a deduction, by all means take it. These are just some items we feel you should ensure that you have the proper support for (hopefully with our guidance).
·Claiming 100% business use of your car (especially if there is no other car available for personal use as they even ask the question on the return);
·Deducting disproportionate or large amounts of business travel, meals and entertainment on schedule C of the 1040 (please ensure you adhere to the proper documentation requirements)
·Having a large loss on your schedule C offsetting your other income (i.e. writing off a hobby loss).
·Deducting rental losses (i.e. claiming to be a real estate professional where you must show you spend more than 50% of your working time and over 750 hours materially participating in real estate activities).
·Running a cash business. IRS is keenly aware of cash intensive businesses (taxis, restaurants, bars, lawn care, hair salons, car washes, etc.). The IRS even has guides for agents to use when auditing cash-intensive businesses, telling how to interview owners and noting various indicators of unreported income.
·Failing to report foreign bank accounts. This is a huge area of focus by the IRS with significant penalties possible.
·Taking higher than average deductions, disproportionate to income.
·Unsupported home office deductions
·Unsupported cash or property charitable contributions
·Improper matching of income reported by 1099, W-2, 1098, K-1, 1099B, etc.
·Claiming an exemption also claimed by another (i.e. ex-spouse, the individual themselves, etc.)
·Not filing your returns.
·Engaging in currency transactions. The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. Appreciate that they look to "step" transactions" that may build upon transactions that are less than the $10,000 threshold.
·Using a less than scrupulous tax preparer or overtly taking unsupportable positions
·Deductions inconsistent with level of income being reported
·Having a big mouth and telling all how you put one over on the IRS, The IRS will even troll Facebook and other sites as well while they will pay whistle-blowers (an ex-spouse, a disgruntled employee, a competitor or just someone looking for a buck) rewards of 15% to 30% of the additional tax collected, including fines, penalties and interest.
·You've been audited already. For the following three years or so, you should be very careful about the aggressiveness or risk you take on subsequent returns, because the IRS is going to be monitoring you
·While filing an amended return doesn't automatically mean a red flag, since the IRS is getting to look at your return twice, which does effectively double the chance they'll see something to look at.
·Claiming tax shelter losses
·Being a shareholder or partner of an entity that has been audited by the IRS.
·Claiming the earned income tax credit - a break for those with low-incomes. There has been a lot of abuse in this area and thus scrutinized more closely by the IRS. That's because its requirements are complex and many honest mistakes are made by those who think they qualify, along with those who intentionally try to increase the credit's payout.
·Filing married filing separately. Be alerted for inconsistencies that might trigger review.
·Filing late (that does NOT mean on proper extension)
·Employee Job Expenses. The IRS generally starts with the assumption that if an employer doesn't reimburse a specific expenditure made by the employee, that expenditure may not be a true job expense. So, if you are a W-2 employee, you must meet the following guidelines: total of all expenses exceeds two percent of your adjusted gross income; the expenses are deemed "ordinary and necessary"; and the expenses were not reimbursed.
·Too many round numbers on a return.
·Alimony deductions that don't agree to alimony income of the recipient
·Unreported gambling winnings
It's criminal to take business-tax deductions to which you are not entitled, but it's a darn shame to miss those that are lawful. The endless tampering by Congress with tax deductions, credits, capital gains taxes and income tax rates makes it more essential than ever to have tax planning reviewed by your professional tax advisor (hopefully that be Abo and Company) to determine whether such deductions are permitted or entirely new strategies need to be employed.
Just another reminder that, tomorrow, January 28th at 12:00 pm Abo and Company's Martin H. Abo, CPA/ABV/CVA/CFF, along with Flaster Greenberg's Steven Poulathas, Esq. LLM, are conducting an up-to-date 2 hour webinar for the New Jersey Bar Association. This seminar, entitled "Is it Income? The Tricky Tax Implications of Non-Salary Earnings", illustrates how taxable income is more than just the numbers on a paycheck or a W-2. It's a complicated series of sources that come together - and, if calculated incorrectly, it can create major and lasting problems for the attorney and the clients they represent. Participants will be provided with a virtual checklist of things they can easily keep an eye out for - things they must keep an eye out for. By the end, they'll walk away with strategies to handle matters involving the income of their clients with confidence learning how to handle employment awards, personal injury settlements, lottery winnings, income from foreclosures and more! Here is a link to the announcement provided by the Bar for any who might be interested.