Posted by Abundant Wealth Planning LLC

IRS Red Flags: What are they?

IRS Red Flags: What are they?

IRS lacks funds and employees and that is the reason why most of the tax returns are being ignored. However, according to a report from Kiplinger, if you have foreign assets, income levels and claimed deductions or losses at any kind, the greater the chance of being audited. Here are a few factors among the following Red Flags:

Earning a lot of money

As your profit increases, the odds increase dramatically too. IRS statistics report for the year 2014 reveals that a person with an income of $200,000 or higher had a 2.71% audit rate or one out of every 37 returns. Perchance you want to declare a $1 million or higher amount of income? Then your return has a one-in-13 chance to be audited. If you declare more income in your return then the higher chance you hear from the IRS.

Neglect to Report All Taxable Income

Assure that you declare all required income on your return because the IRS has copies of all 1099s and W-2s you received. The IRS is capable of matching the numbers on your forms with the income reflected on your return by using their system on their computers but if they found a mismatch then that's time you will be notified a red flag and IRA computers will eject the bill.

Taking Higher than Average Deductions

The IRS will reconsider reviewing your return if they see that your deductions have a huge discrepancy on your income but you have nothing to worry about in claiming it as long as you have all the supporting documents of your deductions. You are not obliged to pay for more than what you owe to the IRS.

Running a Small Enterprise

For self-employed, they can apply for Schedule C which is a treasure trove of tax for their category. Self-employed is considered by the IRS agents as a source of tax whom they know that for some time, they d

o not declare all their income and claim excessive deductions at the same time. Both higher-grossing sole proprietorship and smaller businesses are being observed by the IRS. Those who declare a substantial net loss on Schedule C such as a small bus in owners and cash-incentive businesses that include taxis, bars, hair skins, car washes, restaurants and many more are subject to a certain review. Other small businesses are facing a more thorough audit from the IRS from the time they change their focus on auditing regular companies. By examining pass-through companies such as S corporations, partnerships, and limited liability, they believe that they can have more bang for its audit buck. Thus, they invest more in training their examiners to be able to tackle and learn about issues that are usually encountered by pass-through firms. 

Taking Large Charitable Deductions

IRS raises a red flag if discovered that your charitable deductions are unreasonably large than your income. They are aware of the average charitable donation for people at your income level.

You have a higher chance to be targeted for a scrutinize audit if you neglect your obligations in filing Form 8283 when you receive donations in the form of goods or you didn't get an appraisal for valuable property donations. Also, you will be hearing from the IRS if found that you donated a conservation easement to a charity. Accordingly, you need to keep all the proper documents and all receipts from the transaction you made during the year for cash or property contributions.

Claiming Rental Losses

Usually, there are rules to avoid the deduction of rental real estate losses and that is the passive loss rules. There are two significant exceptions. First, you can be deducted up to $25,000 of loss against your income if you actively engage in the renting of your property. The $25,000 is an allowance that phases out for taxpayers if gross income exceeds $100,000 and it will be entirely eliminated if your AGI reaches $150,000. Second, a real estate professional is required to have more than half of their working hours or a minimum of 750 hours per year as they materially participate in real estate as brokers, developers or rental activity. They can write off losses anytime. Rental real estate losses particularly those written off by the taxpayers who claim to be real estate experts are vigorously checked by the IRS. Individuals who claim to be real estate professionals and those whose W-2 forms or non-real estate Schedule C enterprises that reveal a high amount of income are being scrutinized by pulling their returns. The IRS is strictly evaluating if those people who file have completed the required number of hours particularly the landlord whose regular jobs are not in the real estate business. Many years ago, the IRS came up with a real estate professional audit project that is being practiced up to now and considerably successful.

Taking an Alimony Deduction

If alimony was paid in cash or check that is deducted by the payer while it is taxable to the recipient but you have to satisfy certain conditions. For instance, the transaction payment must be done under a written separation agreement or a divorce or separate maintenance decree. The agreement should not indicate that the payment is not alimony. Also, when the former spouse dies then it means that the payers' liability for the payment is deemed terminated. You will be in awe of how many divorce decrees are filed conflicting with this rule. Child support or none-cash real estate settlements are not included in Alimony. Processing the deduction of alimony is complicated plus the IRS are aware that there are some who files for this that claims write-off doesn't meet the requirements. It also ensures that the payer and the recipient will declare their alimony appropriately with respect to their returns. If the IRS found a mismatch by former spouses then there is a big chance of audit on your end.

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