Archives for December 2014

Tax Audit Red Flag #4 – Charitable Donations Exaggerated

For the average person, there’s nothing more terrifying than the thought of getting an IRS audit. It ranks right up there with fears of dentists, flying, and clowns for some people.

This fourth installment in our series on tax audit red flags focuses on charitable donations. No, this is not to say you shouldn’t give to charity. It’s just to remind you that if you aren’t careful in your giving, you could be bringing a little undesired attention upon yourself by the IRS.

Goodwill donations are great. They are made for a good cause as the items you donate create jobs and help families with less means enjoy items that no longer have value to you.

However, if your charitable contribution is disproportionate to your income, it raises a red flag with the IRS. That’s because the IRS is seemingly omniscient and knows just what the average charitable contribution is for someone in your tax bracket.

In addition, your chances of a tax audit increases if you have noncash charitable donations over $500 and fail to file Form 8283: Noncash Charitable Contributions.

Claiming tax deductions for the full retail value of the item, rather than the resale value of the item is also an IRS no-no. It is a good idea to get an appraisal for the value of all donated property.

What can you do to decrease your risk of raising this red flag?
– Avoid giving more than the average for your income bracket.
– Even if you feel you have a legitimate reason for donating heavily to a specific organization, it’s wise to resist the temptation to make one large lump sum donation if your goal is to avoid unwanted scrutiny by Uncle Sam’s tax man.
– Don’t forget to keep accurate records of your donations as well.
– Photographs of donated items are wise as well in case questions arise at a later date.

To learn more about IRS red flags, keep an eye out for the next article in the series: Tax Audit Red Flag #5 – Money Losing Business(es).

Tax Audit Red Flag #3 – Forgot to Report Income

Well, to put it bluntly, you can get caught. And when you do, the tax man will force you to pay back taxes, in addition to penalties and interest.

So, why is forgetting to report all of your income a tax audit red flag? Because computers are very adept at matching all the income earned documents the IRS receives with what you report on your Federal Tax Return (Form 1040), that’s why. These documents include your employer’s W-2 and 1099s (whether they are bank, brokerage or independent contractor 1099s).

Even if it was a completely honest mistake or oversight in forgetting to report some of your income, the IRS has little tolerance for mistakes – and even less of a sense of humor about those mistakes.

They have zero tolerance policy for human error, so it’s always wise to consider investing in a tax preparer or other tax professional in order to make certain no numbers get left behind on your next tax document.

What’s the lesson here? 

• Avoid the fairly common mistake of forgetting or failing to report a portion or portions of your income for the previous year.
• Keep accurate records.
• Take a note from Santa and check your list of income twice.
• Make sure the numbers are recorded correctly and double check for simple math errors in order to hopefully keep the powers that be at the IRS playing nice.
• If by chance you receive a 1099 that lists incorrect income earned or is clearly not yours, contact the issue to have the form corrected and refiled with the IRS.

Be on the lookout for the next article in the series: Tax Audit Red Flag # 4 – Charitable Donations Exaggerated.

Tax Audit Red Flag #2 – You Have Assets Overseas

Most people would rather pay a visit, fee and all, to the proctologist’s office than endure an IRS audit. In fact, many would agree that proctologists are kinder and friendlier than the average IRS auditor. Knowing the red flags that trigger audits may not prevent all audits, but it can help you invite less IRS scrutiny or unwanted attention.

In recent years, the IRS has turned its focus to US accounts in foreign banks. Where US  citizens once set up tax shelters by banking in places like Switzerland or the Cayman Islands,  new laws now levy substantial fines for failing to report holdings in foreign banks.

What has changed?
The Foreign Account Tax Compliance Act was created. It requires overseas banks to provide the IRS with information on American accounts worth at least $50,000. The law doesn’t simply  involve accounts that have $50,000 in them at tax reporting time, but each account that has  contained $50,000 at any time during the tax year.

Of course, you’re required to report foreign bank accounts that have totaled $10,000 or more at any one time during the previous year via FinCEN Form 114. If you have even more financial  assets offshore you may need to attach IRS Form 8938 as well. This is necessary to avoid a  forceful, and costly, smack to the hand by the IRS.

Taking the right action now can save you the painful experience of an IRS audit in addition to
potentially substantial penalties and fines. It’s definitely in your best interest to avoid waving this particular red flag in front of the bull the IRS has become in recent years.

The penalties of undisclosed (i.e. hidden) offshore accounts are no small potatoes; those that
willfully fail to disclose overseas assets include a hefty fine of $100,000 or 50 percent of the balance, whichever is greater.

Be on the lookout for the next article in the series: Tax Audit Red Flag #3 – Forgot to Report Income.

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You’ve just become a member of an elite club. You’d think a hefty congratulations was in order. Think again. This membership isn’t elective or optional, and the dues can be much more than that prestigious country club you’ve been dying to join. Welcome to the IRS Audit club. Or not.There’s no reason to pay more than what the law requires when it comes to taxes. At the same time, however, you don’t want to go waving a big, bright red flag in front of the IRS either.The good news is that the average person isn’t the most likely to pique the interests of the IRS. The bad news is there are a number of triggers, including an ex-spouse contacting the IRS, that cause the friendly IRS agent to take a closer look at your return.

Revenge of the Ex
Divorces often get ugly. Sometimes so much so, that the ex is out for revenge. Some ex’s do so by going after your reputation – by way of the Internal Revenue Service. They do this through a “Dear IRS” letter with “You” as the subject.

All your ex needs to do to wave this red flag is write a seemingly credible letter to the IRS. It doesn’t even need to be your former spouse. Sometimes former in-laws, employees, and business partners are the ones who do the dirty deed.

In many cases, the allegations are completely false. Some claims have been of ex-spouses owning brothels, failing to report income, laundering money, and actively committing major financial crimes.

Regardless of the allegation though, these informants can cause the tax man to look at your return with a fine-toothed comb. This is just one more reason to seek a more amicable divorce to prevent red flag raising retaliatory letters to the IRS.

Be on the lookout for the next installment: Tax Audit Red Flag #2 – You Have Assets Overseas to learn more about what you can do to avoid involuntarily joining the IRS tax audit club.