The April 15th tax filing deadline is less than a month away. Which means time is running short to schedule an appointment and complete your annual income tax filing is running short. If you haven’t already arranged to meet with your CPA, better hop to it!
One of the biggest anxieties for most taxpayers is the threat of a potential IRS audit. Because even if you crossed all your “T’s” and dotted all your “I’s,” you never know what technicality an audit might turn up. Over and above which, the last thing anyone wants is the government poking around in their finances.
Ultimately, it’s tough to determine what might prompt action from the IRS. But there are a few “Red Flags” that, over the years, have proven to stand out.
Failing to Report ALL Income
Your income is typically reported through W2s, 1099s, brokerage statements, and notices from other managed assets. But flow-through entities, like sole proprietorships, LLCs, certain partnerships, and S-Corps, can also report payments on their filings that could be attributed to you.
High And Low Income Earners
Most audits focus on taxpayers who earn over $500,000 annually. Audits that uncovered discrepancies on wealthy taxpayer’s returns are more likely to result in sizable collections. At the same time, taxpayers who reported no adjusted gross income are also flagged. Claiming that you earned nothing raises the question with the IRS of how you’re able to support yourself and whether you might be hiding undisclosed income.
Excessive Deductions or Credits
The IRS compares itemized deductions and credits with the national average for taxpayers in your income bracket. And the IRS may look harder at your return if your deductions and credits rise noticeably above the national average.
Schedule-C Tax Filings
Sole proprietors and freelancers are allowed to claim deductions for home office space, mileage, meals, and entertainment. Meanwhile, the IRS is aware self-employed taxpayers often inflate their deductions. And Schedule-C filers are also known to under-report income. All of which attracts the eagle eye of the IRS.
Taxpayers Who Don’t File
The IRS is HIGHLY focused on individuals who earned more than $100,000 but did not file a tax return. They carefully compare incoming data across multiple sources to determine whether undeclare income has been reported.
100% Business Vehicle Use Deduction
It’s rare for someone to use a vehicle entirely for business purposes, especially if they don’t own another car. In short, the higher the business-use percentage you claim on your vehicle, the closer the IRS will look at your return.
Home Office Space Deduction
Before the 2018 tax year, select employees could claim a home office deduction as a non-reimbursed business expense. This deduction was scaled back significantly after the pandemic, which saw countless workers shift to “work from home” status.
Self-employed individuals and independent contractors can still claim this deduction, counting actual incurred expenses. The critical caveat is that the home office room or space must be used “regularly and exclusively for business,” Failing to follow these parameters can trip you up with the IRS.
Early Withdraws From IRA or 401(k) Accounts
The IRS heavily scrutinizes those under 59 years of age for retirement account withdrawals. Outside of special exemptions, most retirement account withdrawals tack a 10% penalty on to your regular income tax. This became a particular focus in the wake of the pandemic, which saw scores of jobs disappear, prompting many to withdraw funds from their retirement accounts.
Crypto Currency Transactions
Taxpayers who sell, trade, or use bitcoin or other “Crypto Currency” as a form of payment are now under the microscope at the IRS. Further exacerbating the situation is the fact that many who use crypto to make purchases or receive crypto as payment for goods and services are actually trading what the government considers an “asset” rather than a typical currency. As such, crypto trades are potentially subject to capital gains taxes. And the IRS is likely to pounce on those who fail to report these transactions properly.
Have More Questions About Your Upcoming Tax Filing?
Are there details of your deductions or other aspects of your tax return that have you wondering whether you might be treading on shaky ground?
I’m here to help! Get in touch for a FREE consultation.
