Do you live in fear of an IRS audit?
Five red flags to
avoid on your tax return
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[February 11, 2014]
It is no secret that one of the
biggest fears people have is receiving an audit notice from the IRS.
It ranks right up there with being diagnosed with a life-threatening
illness. Of course, the IRS does nothing to alleviate this fear,
because the more frightened you are, the less likely you will be to
cheat on your taxes.
The IRS audited one out of every 104 tax returns in federal fiscal
year 2013. It's becoming increasingly evident that the greater your
total income, the more you'll attract the agency's attention. Last
year, the IRS audited about 10.85 percent of taxpayers with income
greater than $1 million. The audit rate dropped to 0.88 percent for
those with income less than $200,000.
Some of the audits were taxpayers pulled at random. The rest of
the returns are selected for examination in a variety of ways.
Lowering your IRS profile will help minimize your chances of
being audited. Here are five ways to help you stay off the audit
1. Large itemized deductions: The IRS has established
ranges for the amount of itemized deductions, based on a taxpayer's
income. Deductions that exceed the statistical "norm" for a given
state and region may be red-flagged for a closer look. This does not
mean that you shouldn't take legitimate deductions. Your deductions
could exceed the IRS range due to high medical expenses and large
charitable contributions. Take all valid tax deductions -- just be
sure you keep your backup documentation.
2. Self-employment income: The IRS believes that a vast
amount of underreported income occurs among the self-employed.
Self-employed taxpayers are audited by the IRS far more frequently
than those who receive a W-2 for wages. People who are employed by
others and receive W-2 income but also run a business that reports a
loss are especially high on the IRS radar screen. You will need to
be able to prove you are operating a business with the intention of
earning a profit and not just trying to write off the expenses of a
hobby. You will need to be able to pass both the "passive loss" and
"hobby loss" rules in order for the deductions to stick.
3. Business expenses: Big deductions for business meals,
travel and entertainment are always ripe for audit. A large
write-off will raise red flags if the amount seems too high for the
business. The IRS looks for personal meals or claims that don't
satisfy the strict substantiation requirements. A taxpayer claim of
100 percent business use of a vehicle is also a huge red flag. The
IRS knows it's extremely rare for an individual to use a vehicle
strictly for business.
4. Rental properties: The IRS is scrutinizing rental real
estate losses for those who claim to be real estate professionals.
You must meet two requirements: (1) More than half of the personal
services are performed in real property trades or businesses in
which you materially participate; and (2) You perform more than 750
hours of services in real property trades or businesses in which you
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5. Home offices: Taxpayers who operate a business from
their home are entitled to deduct the portion of their home that
is dedicated to operating the business. The IRS believes that
many taxpayers use this deduction as a means of writing off
personal expenses, so tax returns that claim the home office
deduction are carefully scrutinized. Claiming this deduction
greatly increases the chances that your tax return will be
audited. You should consult a tax expert to determine if you are
entitled to claim this deduction. If the tax savings are
minimal, you may opt not to claim the deduction simply to avoid
the scrutiny. For details, see IRS Publication 587.
There is no way to completely audit-proof your return, and if you
do get an audit notice from the IRS, don't take it personally. It
does not mean the IRS believes your return is fraudulent. When you
get a notice, pick up a copy of IRS Publication 1, "Your Rights as a
Taxpayer." Be courteous and helpful without volunteering more
information than is requested. Plan ahead so that you are organized
and can answer questions promptly. Ask for a postponement if you
need more time to prepare.
If you are a self-employed taxpayer or have unusual circumstances
that place your return outside of the statistical norm, let a
professional prepare the return. Self-prepared returns are
themselves more likely to be audited. The IRS believes that a
nonprofessional has limited knowledge of the 4,000 pages of tax
Tax law is complex. The fee charged by an enrolled agent or CPA
can be easily justified by the peace of mind they bring if you get
the dreaded audit notice.
Rick Rodgers, a certified financial planner, is president of
Rodgers & Associates,
"The Retirement Specialists," in Lancaster, Pa., and author of "The
New Three-Legged Stool: A Tax Efficient Approach to Retirement
Planning." He is a certified retirement counselor and member of the
National Association of Personal Financial Advisers. Rodgers has
been featured on national radio and TV shows, including "Fox
Business News" and "The 700 Club," and is available to speak at
conferences and corporate events (www.rodgersspeaks.com).
[Text from file received from
News and Experts]