The last thing anyone wants is an audit of their tax return!
CPA David Young of the New York State Society of CPAs discussed the aspects of your return that could raise a red flag for investigators from the Internal Revenue Service Monday during News 8 at Sunrise.
“An audit is when the IRS is going to ask you to verify information and it can come in a couple of forms,” explained Young. “They’ll send you a letter just saying, hey send us the receipts for say a large charitable contribution. That’s probably on the low end of an audit. Where it can be as intrusive as, show up to our office and bring your tax return and every receipt of income or every every verification of income and a receipt of deduction. It can go from one extreme to the other.”
Young has a top 10 list of things that could lead to a tax return audit.
1. You earned a lot of money.
According to 2017 fiscal year statistics from the IRS, individual filers who made between $200,000 and $1 million were audited at a 0.8 percent rate. If they were business owners, that rate was 1.6 percent. Those earning more than $1 million were audited at a 4.4 percent rate. If you’re a high earner, be aware that you may hear from the IRS. Consider using some of that income to hire a good tax preparer.
2. You aren’t reporting cryptocurrency.
If you buy something with cryptocurrency, it’s a taxable transaction. If you’re receiving bitcoin as income or successfully mining it, for example, these transactions may need to be reported. The IRS receives information from digital currency wallet Coinbase and may apply increased scrutiny to your tax return if it doesn’t reflect the data provided.
3. You failed to report taxable income.
The IRS gets its own copies of the 1099 and W-2 income forms you have received and may notice your omissions. Track down any tax forms that have gotten waylaid or lost in the mail and contact a tax preparer if you’re not sure about which earnings count as taxable income.
4. You made typos or a math error.
It might be an honest mistake, but if something looks fishy, such as an incorrect Social Security number or calculations that don’t add up, you may bring on additional scrutiny from the IRS. Be careful and check your work twice when filing taxes.
5. You are self-employed.
Business owners may attract additional scrutiny from the IRS. Uncle Sam tended to examine the returns of self-employed filers at higher rates than it did comparable nonbusiness filers, according to IRS data. If you claim self-employment income and deductions through your individual income tax return, double- and triple-check your figures and keep a pristine paper trail to back up tax deductions.
6. You have three consecutive years of business losses.
For self-employed filers who have reported losses for three consecutive years. This may cause the IRS to consider the business a hobby loss.
7. You use round numbers.
Be specific when itemizing various expenses using round numbers may cause the IRS to consider taking a closer look at your income tax return.
8. You deduct 100 percent of a car for business use.
When listing the business use of a work-related automobile, the IRS knows that it’s unlikely that you’re using it 100 percent for work.
9. Large charitable donations.
While the IRS already has been known to scrutinize tax returns with a large charitable-donation deduction relative to the reported income on the return, there’s a chance those inquiries could rise.
10. Overseas accounts and/or ownership of foreign corporation.
If you own an account in a foreign country, make sure you report it if you are required to — the penalties for willful violation of reporting rules can be steep. Any ownership of a foreign corporation/entity that is not purchased or readily available on a United States stock exchange likely requires one or more informational returns to comply with U.S. Department of the Treasury reporting requirements.
Young said, “The bottom line is be honest. Be accurate. Be timely, meaning file it on time.” If you’re not sure about an aspect of your tax return, hire a professional CPA to help.
For more Smart Money advice from the New York State Society of CPAs, visit nysscpa.org/getmoneysmart.