AP Photo/Susan Walsh
Tax season is a time of joy and pain. For some, Uncle Sam is a kind friend who drops a check in the mail just in time for spring. For others he’s a cruel collector, shaking money out of your pocket for the government to spend. But, some taxpayers are destined to meet a worse fate. One where a representative of the IRS looks through every receipt in their possession and decides how much they really owe your government. Getting audited is a real and present danger.
Should you be afraid? According to Michael Rozbruch, founder and CEO of Tax Resolution Services, only about 1.1 percent of people who file a 1040, the most common tax return, are audited. That rate increases to 12.5 percent for people earning $1 million or more. Most audits are triggered by the kind and amount of deductions taken. If you fit one of these profiles, watch yourself. Uncle Sam may turn his attention to you.
She’s very rich! Source: WENN
People Who Make Too Much Money
The money you report on your taxes should match up with what is reported by clients and employers. The IRS gets copies of all the 1099s and W-2s you receive. If the department’s computers catch a mismatch, it usually raises a red flag.
Details about his latest philanthropic effort
here. Photo: Speaking in Texcoco, Mexico. AP Photo/Eduardo Verdugo
People Who Give Away A Lot of Money
Goodwill aside, charitable contributions make great write-offs. But, if the charitable deductions you claim on your return don’t mesh with your income, you might be in danger of an audit. The chances of an audit also increase if you fail to file Form 8283 for donations over $500.
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People Who Claim Home Office Deductions
If you qualify for a home office deduction you can write-off a percentage of everything from real estate taxes to phone bills. But, the rule is clear: to take advantage of this deduction your workspace must be exclusively and regularly used as your main place of business. Make sure you can prove this, the IRS has had great success reducing this deduction during audits to increase the amount of taxes the government is due.
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People Who Claim Rental Losses
If you rent property you can deduct up to $25,000 in losses against your income. But there are some loopholes to the rule. The allowance phases out if your income exceeds $100,000 or you are a real estate professional. The IRS will check to see you are eligible for this deduction if you claim it.
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People Who Deduct Business Expenses
Schedule C, where the self-employed make tax deductions, is a goldmine for the IRS. Entrepreneurs are known to claim excessive deductions and underreporting income. High-grossing sole proprietorships are favorites for auditors. Make sure you keep your receipts and keep detailed records that document each expense, and its business purpose.
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People With Business Vehicles
To receive a deduction for a car you must list what percentage of its use is for business on Form 4562. Claiming 100% business use is a huge red flag for IRS agents. Detailed mileage logs and calendars that specify the purpose for every road trip are important to protecting your right to make this deduction.
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People Who Write Off Their Hobbies
The IRS doesn’t pay for people to have fun losing money. The government requires that you report any income you earn from a hobby, but only allows you deduct expenses up to the level of that income. Claiming a loss requires a reasonable expectation of making profit. The IRS requires that you prove you have a legitimate business and not a hobby, so make sure you can provide supporting documents to show this.
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People With Cash Business
Taxi drivers, hair stylists, restauranteurs are all targets for IRS auditors because they deal primarily in cash. Their business transactions don’t have a paper trail. Auditors actually have a guide for questioning business owners that flag indicators of unreported income.
Credit Suisse CEO Brady Dougan. (KEYSTONE/Steffen Schmidt)
People With Foreign Bank Accounts
The IRS loves people with offshore accounts. Severe penalties are in place for those who fail to report a foreign bank account. Make sure you properly report them when you file to avoid any problems.
Louis Vuitton in Beijing. Imaginechina via AP Images
People Who Make Large Purchases and Deductions
Cash transactions in excess of $10,000 (think banks, car dealerships, and casinos) are reported to the government. Large cash purchases or deposits always draw the IRS’s attention. They are also interested when deductions on your return don’t match up with your income. In both cases, it is important to have proper documentation.
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C. Cleveland covers professional development topics and entrepreneurial rebels who blaze their own career paths. She explores these stories and more on The Red Read, Twitter (@CleveInTheCity) and Facebook (/MyReadIsRed).
