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Audit Red Flags Seniors Need to Avoid

Audit Red Flags Seniors Need to Avoid

Of all the tax returns submitted in 2019, only 0.4% were audited, and 80% of the review was done via mail. This rate has dropped significantly in consequent years, and the COVID-19 also dampened the enforcement effort of the IRS. 

However, one's chance of being subjected to an audit rises based on some factors. When you claim some tax deductions, they will want to look closely at your return. While a Math error might attract their attention, it will hardly trigger a full-blown audit. 


Here are some audit triggers that might make you the target of an IRS audit as a senior:

  1. Making Huge Amount of Money

While the individual audit rate is pretty low, such odds increase as you earn more money. As a result, selling a pretty valuable property or getting a massive payout from your retirement plan might raise some eyebrows. 

Based on statistics, people making between $200,000 and $1 million without schedule C had a 0.4% chance of being audited, while those who filed schedule C had a 1% chance of an audit. 

The idea is not to discourage you from making enough money. However, don't forget that the more money you have, the more likely Uncle Sam will like to have a closer look at your return. 


  1. Going for a Higher-than-average Deduction

If you took so many deductions that they are way more than your income, it would raise some eyebrows. As a result, you will likely hear from Uncle Sam if you have a significant medical expense. 

However, provided you have the proper documentation to bolster your deduction, you should, by all means, go for it. 


  1. Claiming Huge Charity Deductions

Everyone knows the impact of charitable deductions and their effects on write-offs. However, Uncle Sam will be interested if you have extra-large charitable deductions in proportion to your income. 

Uncle Sam knows the value of the average charitable donation for people in your income bracket. Besides, with the absence of appraisal when you donate valuable property, or you didn't file form 8283 for noncash donations, Uncle Sam will most likely beam its radar on you. 

Also, you will most likely hear from Uncle Sam for all conservation easements donated to charity or partnership investment. 

However, you have nothing to worry about with all your supporting documents like cash and property receipts. 


  1. Claiming Rental  Losses

Uncle Sam will be interested if you claim a huge rental loss. Ideally, with the passive loss rule, you cannot deduct losses from rental real estate. However, this comes with two exceptions:

  • For people actively involved in the renting of their property, they can deduct as much as $25,000 loss against other income. At a higher level, this $25,000 allowance reduces. 

  • Also, real estate pros who dedicate over 50% of their working hours to participate materially as a landlord, broker, or real estate developer. Writing off rental losses is permitted. 

Uncle Sam actively explores huge rental losses from real estate. People managing properties while retired might qualify for an exception. Also, people who sell a property that gave suspended passive losses, such as sales, can deduct losses. However, be ready to explain to Uncle Sam should you have a substantial rental loss.

 

  1. Writing off a loss for Your Hobby.

You will likely get audited if you filed a Schedule C and got a significant loss from an activity classified as a hobby like stamp collecting, breeding pigs, or jewellery making. Such changes increase if there are losses from the hobby for many years. Uncle Sam has trained agents who are skilled at sniffing out people who deduct hobby losses wrongly. With this, take caution if one of your retirement plans is to convert your hobby to a money-making venture. 

Before deducting a loss, such activity should be conducted like a business with a high probability of being profitable. Provided your activity makes profit 60% of the time, the law assumes that making profit is your goal, except Uncle Sam thinks otherwise. If you were slammed with an audit, Uncle Sam would expect you to prove that you are running a qualified business, not just a hobby. As a result, ensure you have all essential documents that support your expenses. 


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