Tax season is upon us. And while crunching numbers and sitting down to prepare your tax return can be stressful, we’ve come to find that most people are actually worried about mistakes that could trigger an audit.
However, we have a few items to keep in mind to keep your IRS anxiety at bay. Before we go on to the red flags you should avoid, it’s important to recognize that fewer and fewer audits are happening nowadays due to federal budget cuts that have shrunken staffing sizes.
However, there are still some mistakes you should avoid to make your taxes stress-free.
12 Red Flags That Can Trigger An IRS Audit
The number of tax returns audited continues to drop each year, but even with a lower percentage, it still means millions of taxpayers are left feeling nervous. Here are some red flags that will get the IRS’ attention.
1. Unusual Charitable Deductions
2. Breaking the Rules on Foreign Accounts
Have over $50,000 in a foreign bank? You had better report it, correctly. In the past you just had to acknowledge that you had an account, but new regulations are calling for more transparency.
3. Taking Unusually High Deductions
Deductions should only be taken if you have the proper documentation. If you can’t support a deduction and it appears much larger than your income, then you can expect an audit.
4. You Run Your Own Business
IRS auditors love to pay close attention to business owners because they know just how many deductions there are for self-employed taxpayers and just how excessive some self-employed people can be with their deductions.
Avoid blurring any lines on business expenses and you’ll avoid audits.
5. Incorrect Social Security Number
This may seem insignificant, but the IRS is very careful about ID theft and underreporting income. Make sure all your T’s are crossed and I’s dotted to avoid any catastrophe due to discrepancies in numbers.
6. Inconsistent Alimony
It’s easy for the IRS to check your alimony reporting since you have to put the social security number of your former spouse. Also, alimony for divorce settlements made after December 31, 2018 are no longer deductible due to the Tax Cuts and Jobs Act.
7. Excessive Rounding
Rounding up here and there is no biggie, but too many even numbers will definitely catch the attention of the IRS. Generally we recommend going to the nearest dollar rather than the nearest ten or hundred.
However, thanks to modern day tech and software, if you have the exact figure at hand, use it.
8. Owning a Cash Business
It’s not uncommon for the IRS to come after restaurants, bars, or convenience stores, considering when you handle mostly cash, it is easier to misreport.
9. Reporting Losses from a Hobby
You might as well draw a target on your back if you do this. Reporting multiple losses from an activity that sounds like a hobby while having a lot of income from other sources is not a good idea. To deduct a loss, the activity must be run in a business-like manner.
The IRS has a special computer system designed to detect anomalies, called DIF (Discriminant Information Function). This scans every single tax return that the IRS gets and can automatically detect strange deductions or duplicate info, like claiming the same dependent twice.
11. Failure to Report Gambling Winnings
Recreational gamblers must report winnings as other income. And failure to do so will likely garner attention considering the casino, or other venue, will report amounts in their taxes.
Did you lose big gambling? Claiming these losses is also risky.
12. Claiming Foreign Earned Tax Exclusion
If you work overseas and are a true resident of another country, you can exclude up to $102,100 of income abroad on your return. But the issue is that filers with minimal ties to a foreign country often slip up when filing taxes back home.
While this may seem like a long list of potential red flags, the truth is doing your taxes doesn’t have to be a nightmare. You may not be able to avoid an audit, but steering clear of these 12 red flags can certainly help. When you work closely with a wealth advisor, you can ensure that you and your business are protected. This way, you don’t have to let even the smallest mistake tank your taxes.
If you want to speak more about your taxes and learn how to get your finances in shape by April 15th, let’s talk! Schedule a consultation with our team today!