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Here’s How to Avoid an Audit

Nancy Patterson November 21, 2018 Easy Street Comments Off on Here’s How to Avoid an Audit

Worried About an Audit? Read This Letter to Find out How to Avoid It!

If history is any indicator slightly more than one percent of Americans will get audited this year. But I’m sure nearly 100 percent of us will be worrying that it will be us until tax season is over.

Before you worry too much about an audit, know that IRS statistics show that only 1% of people who make under $200,000 a year get audited, and the vast majority of those exams were conducted by mail. Even if you make more than $200,000 you needn’t worry too much either. Earners in this income bracket had an audit rate only slightly higher at 3.93 percent.

And while some of these audits were random, most audits are actually caused by the actions of the taxpayer. There are eight things that you can do that will get the IRS’ attention and warrant an audit. If you avoid these eight claims, you shouldn’t worry.

Red Flag #1: Not Being Honest About How Much Money You Earned

The IRS gets copies of all 1099s and W-2s you receive, so make sure you report that income. You can’t get away with writing in less than what one of those forms say. The IRS is really good at double checking your numbers against what any employer reports they paid you. Any kind of discrepancy immediately raises a red flag with the IRS.

If you do any freelance work it can be tempting to leave off one or two jobs you preformed if you think your temporary employer won’t report your work. Don’t risk it. If you get caught you’ll pay a fine, tax on the amount you left off and interest on that amount.

In addition don’t forget to report any income you received from the sale of any assets, like your home or stocks. This is another way to get flagged by the IRS and ensure an audit.

Red Flag #2: Taking Large Charitable Deductions

Donating cash or items to charities is a great way to give back to your community AND knock a bit off your tax bill. However, if your donations are disproportionately large compared to your income, it raises a red flag. The IRS averages all charitable donations made by people in your same tax bracket. If yours is a lot bigger than the average donation, you’re going to get audited.

You’re also sure to get noticed if you value any items donated at a high number. The IRS doesn’t like it when people place a value on their donation any higher than 30 percent of the original purchase price. You can’t donate a car you bought eight years ago and expect to write off the purchase price. That’ll get you flagged for sure.

To convince the IRS you are valuing an item correctly and avoid any unwanted attention by them, get an appraiser to write a letter for you. Get an appraiser to look at your item and place a value on it, then have them write a quick note on their letterhead that explains the value of the piece and send it to the IRS with your other tax paperwork.

Red Flag #3: Overstating Your Home Office Deduction

The IRS has had found that many people severely overstate this deduction and thus has had great success knocking down the amount people claim. 

People love this deduction because you can deduct a percentage of your rent/mortgage, real estate taxes, insurance, utilities, phone bills, and other costs that are for a home office. Usually this adds up to thousands of dollars in write-offs.

However, to qualify for this deduction you must use a room or space in your house exclusively and regularly as your principal place of business. You can’t shove a desk in a guest room and call it a home office in other words.

To take the deduction you must figure out the square footage of your office space and divide that by your home’s total square footage. The resulting percentage is the amount you can deduct from your mortgage, taxes, utilities and other home costs.

If you have a 2,000 square foot house and claim that 50 percent of it is for your home office you’re going to get noticed and you’re going to get audited. Be reasonable and only claim the amount of space you actually use.

Red Flag #4: Claiming You Use a Vehicle Exclusively for Business

The IRS knows that it’s extremely rare for an individual to use a vehicle solely for business, especially if you don’t have another vehicle.

Taxpayers who claim their vehicle for business purposes can deduct some of the costs associated with keeping their car road ready. They can either use the IRS’ standard mileage rate which allows you to write off 55.5 cents per mile you drive for business related trips. Or they can use the actual expense method in which you keep records of every expense related to operating the vehicle.

People who use either method to deduct a vehicle they claim is used exclusively for business will be looked at thoroughly. This deduction is one that IRS agents are trained to focus on.

What won’t get you flagged for an audit is claiming to use your vehicle for business and personal pleasure. This is what most people who claim this deduction do. You’ll still be able to write off a percentage of your operating expenses and you won’t have the constant fear of being audited.

Red Flag #5: Having a Bank Account in another Country

Simply having a bank account in a foreign country is not illegal, but failing to report that you have one will get you flagged and investigated. Over the last few years auditing people with offshore bank accounts has been one of the top priorities of the IRS.

The IRS has had great success in finding these individuals. Foreign banks have been very forthcoming with information on their account holders. So far the IRS has collected $.4 billion dollars from taxpayers who try to shield their money from the U.S. government. If caught an individual faces severe penalties along with any additional taxes levied. Make sure to report any such accounts to avoid being investigated.

Red Flag #6: Larger Than Average Deductions

The IRS is well aware of what the average person in your income bracket and field of employment claims in deductions. If you claim higher than usual deductions, you’re going to get noticed.

For example, if you earned $60,000 as graphic designer and claim half that amount in deductions, the IRS is going to flag your account and investigate your claims. You can’t claim deductions that are disproportionately large compared with your income.

The same goes for people who live in expensive areas and only claim small salaries. If you live in Beverley Hills and only claim to make $20,000 a year, the IRS is going to get suspicious.

Instead be reasonable and keep documentation for all legitimate expenses you incur. Don’t risk getting audited over trying to save a few lousy bucks. It won’t work and you’ll pay fines steeper than any amount you try to write off.

Red Flag #7: Bad Math

While this may sound simple, many individuals are selected for audit because they made basic math errors. If you invert two numbers or make a mistake when transferring amounts from one form to the next, you can really mess up your tax return and thus trigger an audit.

Before you send in your paperwork go over your numbers and make sure that each column adds up correctly. Taking an extra minute or two to double check your math can save you a bunch of stress and worry that having to deal with an audit causes.

Red Flag #8: Claiming Losses from Rental Property

The IRS limits the types and amounts of losses you can deduct for a rental property if you are not a real estate professional.

There are two exceptions to this rule. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. But this $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000.

A second exception applies to real estate professionals who spend more than 50% of their working hours and 750 or more hours each year working on real estate related activities. They can write off losses without limitation.

However, since the IRS has received a large influx of individuals claiming this deduction over the last few years they have started to scrutinize these tax returns. Be sure to keep detailed records to avoid getting caught.

I have always felt the need to be extra careful with my taxes. I am a stickler for saving receipts and statements because I’m always worried about being audited. Individuals, who are self-employed, like me, are audited five times more than the average employee, according to IRS data. That statistic scares me. I’ve never been audited and I sure as heck don’t want to it to happen now.

I’ve heard all kinds of crazy tactics people try in order to avoid an audit. A relative once assured me he had never been audited because he always waited till the last possible day to file his return. He was sure that the IRS was so overwhelmed by the amount of returns at that point, that his account was consistently overlooked. It was also suggested to me once to underpay my taxes by $5-10. The theory was that my account would go to collections and I may incur a small fine, but that it would insure that I wasn’t audited.

I’m not willing to try these crazy schemes and I don’t want you to either. There is no need. Just be honest and avoid the eight activities above and you should have no problems with the tax man.

Good luck!

Keeping Money in Your Pocket,

Nancy Patterson

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