Wednesday, March 16, 2016

8 Things the IRS Looks for on Your Tax Returns

By Brian Figeroux

We are all confronted with a myriad of unsettling issues in the daily management of our lives. Two words in the English language strike absolute terror in the bosoms of us all. What are these two dreaded words? Tax audit. Who exactly is the IRS hunting for in their quest to locate the perfect candidate for an audit?  First let us define our vocabulary. An audit is simply the IRS double checking your numbers to ascertain that you don’t have any discrepancies on your tax return. According to the Motley Fool, the modus operandi of the IRS is as follows:  they send a letter about particular items on your tax return, request supporting documents or ask about a math error it thinks it has found.  The audit letter will contain a comprehensive explanation of the questionable part of your return accompanied by an explanation of the pertinent tax rules.  What are some of the things the IRS looks for in all of those tax returns that reach them by the 15th of April?
1.    Charitable donations. According to Nerdwallet, you should not claim too many charitable donations. If you did in fact make generous contributions to a philanthropic organization you will certain be eligible for some well-deserved deductions but be forewarned—don’t report false donations.  It’s mandatory that you maintain meticulous records-you must have proper documentation to prove the validity of your contribution.

2.    Schedule C.  Do not report too many losses on Schedule C which is a form that is required for the self-employed who can take deductions that will lower their taxable income.  Being your own boss, you might be tempted to conceal income by filing personal expenses as business losses.  The IRS scrutinizes Section C with a very watchful eye.

3.    Home deductions. Claiming a home deduction is narrowly defined by the IRS. It is reserved for people who utilize a designated section of their home exclusively for a business. Only claim a home office deduction if you have set aside a section of your home for your business.
4.    Higher than average income. According to Quick books Intuit, having a higher than average income will possibly lead to increased odds of an audit. You will need to keep meticulous financial records. Large deductions that reduce the amount of your taxable income may cause a red flag at a desk at the IRS if they are out of proportion with your income. IRS uses tables to determine how much is too much.

5.    Numbers that have been averaged.  Rounding up or averaging numbers in our everyday life might be an acceptable practice but when it comes to your tax return it can trigger an audit.

6.    Claiming business losses. Claiming business losses year after year will cause the IRS to take a second look.  If you run a legitimate business that continually reports a loss the IRS might just assume that you are taking deductions that you are not entitled to. Why would you do that? They might think you are trying to avoid paying taxes.

7.    Business entertainment. If a particular tax return includes higher than average entertainment expenses be careful.  If you are going to deduct these types of expenses you must keep records where and when it occurred, who was in attendance and the purpose as it relates to your business.

8.    Claiming your vehicle. If you claim your vehicle, be it your car or van or truck, as 100% business, you will have to choose between the IRS standard mileage rates and actual expenses.   Do not deduct both of these on your tax return. You will need to provide precise records that include mileage logs, dates and the purpose of each and every trip.

The aforementioned list is just the tip of the iceberg concerning what items on your tax return the IRS is looking for before they send, seal and mail that letter inviting you for an audit.

1 comment:

  1. These are great tips.

    Regarding Schedule C, what is the loss that the IRS considers acceptable without suspicion?