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At this time every year our tax attorneys are inundated with questions from clients regarding what they should look out for to ensure they don’t send any red flags to the IRS that would trigger an audit.

With the deadline for filing your tax return rapidly approaching, we thought it would be a great idea to ask our tax attorneys about some of the most common red flags that the IRS is looking for when they’re deciding to audit someone. Note: this blog is not intended to be legal advice, and was designed solely to inform the public on common mistakes that lead to tax audits.

Failure to Report all Income

This one seems obvious, but you might be surprised how easy it is to forget to report a source of income.

This is especially true for people who do freelance work. Any company a freelancer does work for is required to send the IRS 1099 and W2 forms that report all the income they earned. They are also supposed to send these forms to you – but it’s not out of the ordinary for these to get lost in the mail, or have incorrect figures on them.

Keeping your own books is crucial to make sure that you’re reporting the appropriate amount, and that someone else’s error doesn’t increase your tax liability.

A typical issue that plagues many high tech workers in the San Francisco Bay Area is the double counting of income from stock options, or employee stock purchase plans that is reported on both W2 and a 1099B from the brokerage house that handles the trades.  Anyone selling stock must make sure to report the sales and take credit for the basis, or gain that has been reported on the W2.  San Francisco tax attorneys are often asked to step in and resolve the erroneous tax bills issued to Silicon Valley employees due to this issue.

Charitable Deductions

This is one of the most common deductions that people take on their taxes; and subsequently one of the most common that people abuse.

The IRS may examine your total amount given to charity in relationship with what you make each year. Then they’ll compare that to what other people in your tax break donate each year. If you have donated much more than people with similar income, this could potentially trigger an audit.

A tax attorney in San Francisco says “I’m sure it’s no surprise to you that documentation is huge for these deductions. If you’ve donated something that isn’t monetary, you need to be able to prove the value. If you have donated money, it’s crucial to get a receipt from the organization you’ve donated to.”

Home Office

One of the most common deductions people get wrong is the home office deduction. The rules for taking the home office deduction are very specific, and can be tricky for people who aren’t professional tax preparers.

One tax attorney in San Jose said “There are a lot of people who really do work from home often, but still do not qualify for the home office deduction. You need to know the rules and do your homework for this one.”

Here is the IRS guide for the home office deduction.

Digital Currencies

This is a new one that our tax lawyers are just starting to deal with. The IRS is currently in the process of making sure that people mining and trading cryptocurrencies are reporting all of the income they are earning from their efforts.

While the IRS is still trying to catch up with this technology right now, you can be sure that they will be coming after all the money they are owed. We’ve seen horror stories in the news from people who had made thousands from bitcoin, and weren’t even aware they needed to pay taxes on those gains. Then they get hit with a tax bill for money they’ve already spent, and are in serious trouble. Don’t let this happen to you.

 Tax Audit Defense

If you do find yourself in hot water with the IRS, an experienced tax attorney can help you with a tax audit defense, as well as tax audit reconsideration.

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