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Top 10 IRS Audit Red Flags

No one wants to pay more income taxes than they are required to, but be careful if you do your own taxes. Attempting to cut your tax liability by getting into IRS grey areas can cause you problems later on. You don't have to do anything unethical to get your return pulled for an audit, you just have to raise too many of these red flags. If you’re in the middle of an audit or owe back taxes, contact us to schedule a free consultation.
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1. Making too much money. Sounds like a problem everyone would like to have, but making over $200,000 may make you more likely to be audited. The fact is that there are fewer auditors, so the IRS is focusing on where they can make the most bang for the buck.

2. Not reporting all your income. No matter how much or little you make, report everything. In some way or other, unless you run a strictly cash business (another red flag), all of your income is reported to the IRS. W2, 1099 and other forms you receive are duplicated and sent in to the IRS. If your reported income doesn't match theirs, that's one more red flag.

3. Math errors. Whether you file electronically or still file paper forms, your information gets entered into a computer. And one thing computers are very good at is doing math. If things don’t add up, or there was an honest mistake in inputting the information, it can raise a red flag. A math error won't necessarily get you an audit, but it will get attention you may not want. Make sure to double check your returns and have a qualified tax professional assist you and keep you out of tax trouble.

4. Home businesses that never make money. Sole proprietorships that file a Schedule C year after year and always show a loss will raise a red flag. Even if you show a profit, but the profit margin is always unreasonably small, that will get the IRS' attention.

5. Large charitable deductions. There is nothing wrong with being charitable and there is no legal limit to how much of your hard earned cash you can give away, but if your donation is out of sync with the norm, that's another red flag.

6. Overstating business expenses. Depending on the type of job you have, there can be many legitimate expenses that your employer doesn't reimburse you for. If you’re a business, you might be tempted to write off just a little extra. These might be genuine deductions. But don't try to deduct something that's not on the approved list and don't claim deductions way outside the norm. Check with your tax professional and stay up to date with tax laws so you’re not padding your tax return with write offs.

7. Sketchy real estate rental revenue or losses. Some people will 'rent' their property to friends or family at well below market value and then claim normal rental business expenses. As with other areas, the IRS compares what you claim against local standards to determine if this is a legit business. If not, they will disallow the deductions.

8. Home office deductions. There are absolutely legitimate home office deductions but the IRS has very strict guidelines on what you can claim and how much. Try to claim too much and this is a classic red flag.

9. Claiming losses for things that aren't deductible or deductible in your circumstances. One example is claiming day-trading losses on a Schedule C. If you dabble in stock trading and take a loss, it may or may not be deductible, but almost certainly doesn't qualify for a Schedule C loss. You also can't take a deduction for alimony. The IRS maintains a list of non-deductible expenses, make sure to check that and check with your tax professional.

10. Claiming 100% business use of your vehicle. If you spend most of the time in your vehicle doing your job, you may think it's easier just to claim the whole thing for business. Wrong. You will either have to show your personal use, no matter how small, or show you have a second vehicle for personal use.

Many of these items are red flags for an audit, but many are also legitimate deductions. The key is to have a qualified tax professional on your side, especially someone who is well experienced in tax resolution and can help you minimize the risk of an audit and the resulting tax problems down the road. At the very least, keep meticulous records and make sure you are inside the guidelines of the IRS.

If you need an expert tax resolution professional who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem. www.clearcuttaxsolutions.com

www.clearcuttaxsolutions.com

Ways and Means Unveils Its "Big, Beautiful Christmas Present"
In his usual Art of the Deal manner, President Trump sold his party's tax reform plan yesterday, "We are giving them a big, beautiful Christmas present in the form of a tremendous tax cut, which will be the biggest cut in the history of our country." Whether it is the bigliest tax cut in history, it is certainly a present for some and a lump of coal for others. At the top of the Good-Little-Children list is corporations with high effective tax rates. The proposal would slash the corporate income tax rate from 35 to 20 percent, costing $1.4 trillion over 10 years. GOP leaders are gambling that this rate cut will spur significant job growth.

How it effects families will depend a lot on where they live and how reliant they are on specific deductions. Personal tax brackets will go from seven to four: 12 percent, 25 percent, 35 percent, and 39.6 percent. Standard deductions double for most taxpayers, but they repeal the personal exemption. On the other hand, they increase the child credit to $1,600 per child and extend the credit to those earning $230,000. The proposal eliminates the Alternative Minimum Tax but repeals most exclusions and itemized deductions. The exceptions are mortgage interest (capped at $500,000 and no second mortgages), state and local property taxes (capped at $10,000), and charitable contributions.

So, what is repealed?
• Tax preparation
• State and local income and sales taxes
• Medical
• Alimony
• Moving
• Casualty losses
• Medical savings accounts
• Employee expenses
• Employer provided housing
• Employee achievement awards
• Dependent care
• Adoption assistance
• Some education related provisions