Although earning a substantial amount of money always raises a person’s chances for an audit, it is not the only reason the IRS may choose to scrutinize your return. Because of the Tax Cuts and Jobs Act, which is now a factor for the first time, there are new red flags you should know about. Whether you are having an accountant or tax attorney prepare your return or you are completing it yourself, the scenarios outlined below may have an impact on your risk for an audit:
Unreported income is one of the most common red flags for a tax audit. This is usually due to a discrepancy between the data already in the hands of the IRS and the income you choose to report. Any form you receive showing income, such as a 1099-MISC or a W-2, must be declared on your taxes. Failure to report any such earnings may result in an audit.
Generous Charitable Contributions
The IRS has been known to monitor large charitable contributions, but such inquiries may rise for the 2018 tax year. This is because charitable donations are one of the few deductions left with which taxpayers can lower or offset the taxes they owe on income. Therefore, they will likely come under greater scrutiny. If you take this deduction, it must be itemized, which may tempt you to “bunch” several years of charitable donations into one tax year in order to meet the minimum deduction. However, the IRS is familiar with the normal donation amounts for various income brackets. For this reason, if your deduction for charitable contributions is too high for your income, it may trigger an audit.
Rental income has always been high on the list of factors that may lead to an audit, but it may be even higher this year. If you rent out any space in your dwelling or other structure for 14 days or more during the tax year, the income must be reported. Of course, you can reduce the amount of taxable income by deducting numerous expenses related to renting. These include advertising, local licensing, and other expenses such as utilities, property taxes, mortgage interest and repairs. One common red flag with regard to rental income is showing a loss year after year. Keeping careful records of your expenses and the exact amount of profit you make on any rental space may help you avoid an audit.
Because deductions and allowances are seldom seen in round numbers, the presence of a significant number of zeros on your tax return may trigger an audit. Never round up or down, but rather list the precise amount of each deduction to the penny.
If you own an overseas account or have any financial holdings in another country, be sure to list them on your tax return, as penalties are very steep for willfully violating reporting rules regarding offshore accounts. Overseas accounts valuing more than $50,000 per year per single filer and $100,000 per year for married couples must be reported on a form 8938 when taxes are filed. It is important to understand that the IRS may find out about offshore accounts even if you fail to report them, as foreign financial institutions are obligated to disclose this information to the IRS on all US citizens. For particularly complicated returns, the services of a tax attorney may prove helpful.
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