How To Avoid an IRS Tax Audit

Mar 28, 2016 | Blog

Picture of IRS tax auditor

 

Spring has officially sprung, and the filing deadline for 2015 tax returns is looming just around the corner. After the dust settles, the IRS conducts audits, and usually taxpayers are selected based on suspicious activity.

Every tax attorney and tax expert in Burlingame is buried up to their elbows in paperwork until the proverbial Tax D-Day, but we wanted to take a few minutes to highlight some common situations that may subject you to a tax audit.

  1. Earning High Wages: Unfortunately, the odds of an IRS audit rise dramatically as your income increases. Currently, the overall individual audit rate is only about one in 119 returns. Conversely, in 2014 people that earned $200,000 or higher were audited at a rate of one out of every 37 returns, and taxpayers that boasted $1 million or more of annual income faced a one in 13 chance! If you are fortunate enough to earn a hefty salary, be prepared for a potential audit.
  2. Claiming Large Charitable Deductions: It’s great that you decided to donate to charities for tax deductions. However, make sure your return accurately reflects these contributions, as the IRS knows what the average charitable donation is for your income level (usually around 3% of taxable income). If claimed deductions are disproportionately large, it raises a red flag. Additionally, if you don’t get an appraisal for donations of valuable property, or if you fail to file Form 8283, your chances of landing in the tax audit hot seat are even greater.
  3. Taking Alimony Deductions: Provided that specific requirements are met, alimony is deductible by the payer and taxable to the recipient. Payments must be made under a divorce or written separation agreement, and alimony does not include child support. Additionally, the IRS checks that both parties properly reported alimony on their individual returns, and discrepancies will almost always trigger an audit. The rules on deducting alimony are complicated, and a knowledgeable tax attorney in Burlingame can make a tremendous difference in helping you with tax planning.
  4. Writing off Losses for a Hobby: Any income generated from a hobby must be reported, but you can deduct expenses up to the level of that income. However, to be eligible to deduct a loss, you must be running the hobby in a business-like manner and have a reasonable expectation of turning a profit. If your hobby generates profit three out of every five years, the law assumes that you’re in business to make a profit. Be sure to keep thorough supporting documents for all expenses.
  5. Early Payouts from an IRA or 401(k): The IRS double checks that taxpayers with workplace retirement plans are paying taxes on distributions. Special attention is given to payouts before age 59½, which are usually subject to a 10% penalty on top of the regular income tax. An IRS sampling found that nearly 40% of individuals audited made errors on their tax returns with respect to retirement payouts. There are instances in which withdrawals escape the 10% penalty, such as payouts made to cover large medical costs.

If you have questions about IRS audits or late tax returns and need the help of an experienced tax attorney in Burlingame, Hillsborough, San Mateo, or the entire bay area, Tax Helpers is ready to help! Call us today to make an appointment at 1-866-TAX-TAX-5.