Long after the end of this year’s tax season, the dreaded words IRS audit it means a headache is on the way for many US taxpayers.
Typically, the tax agency audits less than 1% of all tax returns. But even 0.5% is still one in 200 taxpayers, which can make you sweat a lot about your chances of being audited.
But being chosen for an audit is more than a game of chance and you are less likely to attract the attention of the IRS if you pay attention to the common warning signs when filing your taxes this season.
Here are 12 to watch.
First, let’s take a look at some red flags that can not be avoided.
1. Make a lot of money
Statistics don’t lie – the more money you make, the more likely an audit is to reach you.
“Despite common misconceptions about IRS exam fees, the reality is that the likelihood of an audit increases significantly as income increases,” said IRS Deputy Commissioner Sunita Lough.
This does not mean that low-income workers can waste time during the tax season, but only prepared for extra scrutiny with a higher income.
The IRS says that typical audits for high-income taxpayers involve at least three different tax years and can take years to resolve. So, if you are part of this group, take extra care when filing your taxes and consider getting help from tax experts.
2. Run a company
This may seem unfair. If running a business was not difficult enough during the COVID-19 pandemic, now you also need to worry about being audited.
But ask any business owner about the paperwork involved – there are some things you can lose when doing your taxes, so the IRS will bring your magnifying glass for you to return.
Table C, the tax form that individual homeowners will complete, has a ton of deductions for freelancers. But the tax agency knows from experience that the deductions can occasionally exaggerate.
3. Large detailed deductions
When declaring your taxes, you have two options: list your deductions and list them one by one or use the standard simplified deduction.
Deductions lower your taxable income and help reduce your tax bill, and after a 2017 tax law almost doubled the standard deduction amounts, most U.S. households choose to do so.
However, some taxpayers have many legally permitted deductions for eligible expenses and will discriminate against them instead. A super high itemized deduction will open some eyes for the tax agency. Make sure you have all the documentation on hand to prove your income tax return.
4. Large charitable donations
There are many causes that need help this year, and it costs you nothing to discard that good deed as well.
But if your charity donation is surprisingly high compared to your income, it’s a red flag for the IRS. The agency knows the average donation to charity for each income level.
If your adjusted gross income is $ 75,000, the average annual donation to charity is just over $ 3,000. If you donate, say $ 10,000 in a single year, expect a greater chance of receiving a response from the IRS.
As part of this year’s new tax changes, the agency is really making it easier to obtain tax incentives for donations, with a decrease of up to $ 300 in cash contributions to charity, even if you make the standard deduction.
5. Dealing with cryptocurrency
If you like to buy and sell Bitcoins and other digital currencies, the IRS wants to know.
In 2019, the agency began sending thousands of letters to cryptocurrency holders, warning them that they may have violated federal tax laws.
Tax rules treat Bitcoin and other cryptocurrencies as property for tax purposes and have published a set of frequently asked questions to help you file correctly.
6. Cash transactions
The inspector can knock on your door simply because you work in a particular industry. Businesses that involve money, such as restaurants, laundries and laundries, are more likely to be audited due to the difficulty of verifying income received in cash.
Try to document your business transactions as much as you can. If the IRS calls, they will want to confirm that your lifestyle is supported by your reported income.
Speaking of cash transactions, any company that receives more than $ 10,000 cash in a single transaction must submit a form to the IRS. So, if it is raining at pawn shops, car dealers or casinos, be prepared for a closer look.
Then, these (likely) errors will also attract the attention of the IRS. Here they are six red flags that can I be avoided.
1. Incorrectly inform the health premium tax credit
If you cannot obtain affordable health coverage through your employer and are not eligible for Medicare, Medicaid or other federal insurance, you can obtain a useful tax credit when purchasing insurance through a market such as health.gov.
You can choose to have the credit paid in advance to the insurer to reduce your monthly payments and then complete the necessary paperwork when filing your taxes.
If you forget to report this benefit or claim it even if you are over the income limit, you may receive extra attention from the IRS.
It may be useful to research and compare the rates of health insurers.
2. Failing to report a foreign bank account
If you are an American taxpayer who hides some of your money outside the United States, the prosecutor will find out.
You better report your money before the IRS shows up. Failure to report your foreign bank account can lead to severe penalties.
Just be sure to submit a Foreign Bank and Financial Account Report (FBAR) by the deadline.
3. 100% commercial use of a vehicle
Business owners can list the depreciation of their cars and the percentage of commercial use during the year.
But claiming that 100% of the use of your vehicle is for business is a big red flag. Have you same never used that car for anything but business?
If you want to legitimately save extra money on your car, make sure you are paying too much for insurance. If you haven’t been looking for fees recently, you may be paying $ 1,100 more than necessary.
4. Claim the home office deduction
It’s time to finally spend all the new home office products you bought last year, right?
Even though the pandemic forced more people than ever to work from home in 2020, most will not be able to claim a deduction from the home office.
To save some money on these expenses, try a free browser extension to compare prices and make sure you’re getting the best deals.
Before 2018, some employees could drop household expenses if they opted for detailed deductions. Now, the benefit is available only to self-employed or self-employed who use the space of their residence exclusively for business.
Even if you are eligible for this write-off, you need to calculate what percentage of your home was used for business, and the IRS will signal your return if that number looks suspicious to them.
5. Making a prepayment of retirement accounts
All that money you are paying on your traditional IRA or 401 (k)? Technically, you don’t have to wait until you retire to start retiring.
But if you decide to make some withdrawals before the age of 59 and a half, there are some tax implications. You will pay a 10% penalty in addition to the normal income tax, unless you qualify for an exemption, such as using your IRA to buy your first home.
The IRS is looking for taxpayers who don’t really qualify for these exemptions.
Creating a strategy for your retirement accounts is not always simple. You can consider speaking with a certified financial planner (CFP), who can help you make a personalized plan.
6. Nonfilers
This may seem obvious: if you don’t even bother filing an income tax return, the IRS will raise an eyebrow.
But the IRS has had a hard time keeping track of people who don’t file tax returns – and it’s the high-income non-archivists who are causing the biggest problems. The Inspector General of the Treasury for Tax Administration released a report in 2020 that highlights tax money being left on the table for not harassing non-archivists and sets out recommendations to help the IRS fill this fiscal gap.
This means that even if you don’t earn much, the tax agency can take non-filters a little more seriously this year.
If this is your first time, check out our guide on how to file your taxes. The process can be confusing at first, but being audited is manner more complicated.