Posted by MyTaxDog

How To Avoid Deduction Red Flags to the IRS

How To Avoid Deduction Red Flags to the IRS

Tax returns can be a stressful process, especially if you are bothered about getting audited. The fact is less than 1% of all tax returns are analyzed in more detail. Therefore, statistically, the chances of being audited are fairly low, to begin with. However, these situations can increase the chances of your return being flagged.

High-Income Earnings

Having a decent life is a good thing, except that if your income exceeds a certain threshold, the risk of auditing can increase. For the 2018 fiscal year, taxpayers who earned between $ 1 and $ 499,999 had audit fees of less than 1%. But people who made between $ 1 million and $ 4,999 million made 3.52% of certified profits.

The very high income was even worse. Those who reported between $ 5 million and $ 9,999 million had audit fees of 7.95%, while those who made $ 10 million or more had a commission of 14.52%.

Now, that doesn't mean you shouldn't go out and earn as much as possible. Remember that beyond a specific limit, the risk increases.

No Income Earnings

As the IRS tends to look at tax returns that report high income, the agency also takes keen interest when no income is recorded. If you are entitled to enough tax credits that return enough money to your pocket, you may fall into a situation where your AGI is reduced to zero; so don't hesitate to claim it. Remember that the IRS can ask you a few questions about your application if you do.

Deduction of disproportionate business expenses

Usually, you need money to make money. But if you are self-employed and require a lot of expenses concerning your income, the IRS may take a closer look. For example, it is not uncommon for you to spend $ 10,000 on business expenses while earning $ 100,000. But if you ask for $ 50,000 in expenses to earn $ 70,000, it's much more unusual. Whatever professional costs are required, make sure they are well documented. That way, if the IRS knocks on the door, you will have evidence to show.

Making significant charitable deductions

There is absolutely nothing wrong with being charitable and donating some of the hard-earned money. But if you're generous enough not to make financial sense, the IRS will likely notice. Therefore, if you are reporting adjusted gross income of $ 40,000 but claiming $ 20,000 in charitable deductions, the IRS will ask you how you can afford to share a large part of your income and if that number is legitimate.

Request 100% commercial use of a vehicle

If you are an entrepreneur and use your vehicle for professional purposes, you are permitted to write off your tax expenses. You can do this by deducting the mileage (when you get a predetermined amount per kilometer driven for professional reasons) or by claiming the actual costs for your vehicle, such as maintenance, auto insurance, and repairs.

If you use your vehicle for both personal and business purposes, you can only deduct a portion of these expenses. For instance, if your vehicle is driven for personal use 40% of the time and for professional reasons the remaining 60%, you can only claim 60% of the costs mentioned above. Most people can legitimately claim to be using their vehicle for business purposes only, and if so, they may end up at the wrong end of an audit. The only exception will be if you work for a fully shared transportation service, like Uber or Lyft. If this is the case and you live in a transit area, you will not be able to use your vehicle for non-professional purposes.

Do not earn enough income to maintain your lifestyle

Claiming deductions that do not match your income in any way is a great indication to the IRS for them to audit you. For example, if you deduct interest on a $ 500,000 mortgage, but report only $ 50,000 of income, the IRS will ask you how to pay for your home, and will likely be looking for income that they think you are hiding.

Most respondents prefer to avoid tax audits; therefore, if you are one of them, consider these critical warning signs. That said, don't panic if your request is verified, as long as everything you've said is legitimate. 

All you need is additional documentation to remove the IRS from your back, and when you do have it, you're safe on all sides.

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