Tax Center Sponsored by . 10 tax audit red flags From being too charitable to claiming the home office deduction, beware these tax audit red flags. . CNNMoney By Blake Ellis 22 hours ago . . .. . . 1. Youre very charitable .. View gallery . Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney Be careful not to overstate your good deeds. The IRS has calculated the average donation level for each income range, so anything that far exceeds those amounts could cause the agency to take a second look at your return. Youre required to keep receipts for any donations exceeding $250, and to fill out Form 8283 for any non-cash donations exceeding $500. And be realistic: non-cash donations are where a lot of people often exaggerate, so remember that the items youre giving to Goodwill should be valued at the price someone would actually pay for it -- not the amount you bought it for years ago. What you think its worth probably isnt what the IRS thinks its worth, said Pat Connolly, a tax partner at BlumShapiro. 2. You deduct your home office .. View gallery . Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney The home office deduction is one of the most complicated and abused deductions in the tax code, which is one of the reasons the IRS is introducing a new, simplified option for claiming it this year. In the past, taxpayers who claimed the home office deduction were required to fill out a separate form calculating the percentage of their homes space used solely for the business and the percentage of expenses that apply to the office, which can be very complicated to figure out. But starting this year, you can simply claim $5 per square foot of workspace, up to 300 square feet. The deduction will be capped at $1,500 per year and the form for claiming it will be simplified. That doesnt mean there isnt still room for error, however. The IRSs definition of a home office remains unchanged, and this is where a lot of people get confused or try to stretch the rules. So remember, just because you work from home a couple days a week or check work emails from your kitchen doesnt mean you can claim the home office deduction. Your home office must be your primary place of business and used exclusively for work. 3. You claim bizarre deductions .. View gallery . Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney Air conditioning for an excessive sweating disorder, a nose job for a wine taster -- bizarre deductions like these are likely to spark suspicion from the IRS. But dont let that stop you from claiming them if they are legitimate. Both the nose job and the air conditioning unit were allowed, for example. But others, like used underwear donated to charity or medical bills for pets, were not. So dont stretch the limit too far, and when in doubt, ask a tax professional before turning yourself into a target for the IRS. 4. Youre a millionaire Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney Being rich has its benefits, but not when tax season rolls around. The more income you report, the higher the likelihood youll get hit with an audit. While the audit rate stands at a low 1% overall, it jumps to 9% for people earning between $1 million and $5 million and to an even higher 18% for people with incomes between $5 million and $10 million. Among those earning $10 million or more, 27% face audits. To avoid being forced to share your wealth with the IRS, be sure to keep up-to-date records of all income, donations and other transactions. The better documentation they have and the more organized they are, the less headaches they will have down the. Its really important to maintain good records, said Jordan Niefeld, a certified public accountant at tax firm Gerstle, Rosen & Goldenberg, P.A. 5. You claim the same child someone else does Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney If your ex files their taxes before you and claims your child as a dependent, the IRS is going to be very suspicious when your return comes in claiming that same child as your dependent. This often happens when a couple gets divorced and one parent has primary custody, but the other still tries to claim the child as their dependent. Or when a grandparent is the sole caregiver, but the parent still claims the child as their own. Even if youre in the right, the IRS may force you to provide extensive proof that the child you are claiming does indeed qualify as your dependent. This can happen year after year, even after proving to the IRS you are the one who is correct in deducting the child, said Al Giovetti, a CPA in Maryland and a member of the National Society of Accountants. 6. You have money abroad Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney The IRS has been on a crusade to retrieve money thats been illegally stashed in overseas accounts. So even if you have money in a perfectly legal account abroad, you need to report it or you could be in big trouble. Failing to disclose assets exceeding $10,000 that are held in offshore accounts could result in penalties, including a fine of up to $100,000 or 50% of the account balance, whichever amount is greater. There are some very wealthy people who intentionally disregard the rules, but then there are those people who disregard the rules without realizing it, said Connolly. Its better to be safe than sorry (and report everything). 7. You claim the Earned Income Tax Credit Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney Fraudsters love the Earned Income Tax Credit, a refundable credit of as much as $6,000 depending on your income and how many children you have (the more children, the bigger the credit). Thats why the IRS tries to make sure that this credit is only doled out to people who deserve it. To find out if you qualify for the EITC, use this tool on the IRS website. And if you claim the credit, make sure you have documentation including the Social Security numbers for all of your children and proof that they live with you -- like letters from their schools or doctors that were sent to your address, said Giovetti. 8. You deduct gas costs Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney Most employers reimburse you for driving-related costs like gas. So if you try to deduct hundreds or thousands of dollars worth of automobile costs as a business expense, thats going to raise eyebrows at the IRS. If you happen to work for an employer who doesnt have a policy for reimbursing you for auto expenses, the IRS would want to understand your employers policy, since generally companies will reimburse you for any expenses related to the business, said Connolly. And if you own a business, you can only deduct business-related costs. The gas you buy for your personal driving costs cannot be mixed up in that, or the IRS will ask for documentation of everything. 9. Your business is really a hobby Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney Who wouldnt like to turn their favorite hobby into a business? Year after year, taxpayers continue to report losses on their taxes from businesses that are really just activities they like to do for fun. But the IRS wont be fooled. The general rule of thumb is that if the venture hasnt earned a profit in three out of the last five years, its usually not a legitimate business. Dave Du Pal, vice president of customer advocacy at TaxAudit, represented a client in an audit who had set up a side videography business where he filmed weddings and special events. It was his first year in business and he reported a loss. The IRS came after him, saying it was just a hobby and not a business. But after providing documentation of expenses like advertising costs and showing records of meetings with business strategy experts, it was approved and the client was let off the hook. 10. You fail to report income Illustrations by: Dominic Aratari and Gwendolyn Sung/CNNMoney For many people, reporting income is pretty straightforward. But for those who earn money a variety of different sources, it can be easy to forget a stray account. Giovetti says some clients forget about small brokerage accounts they have, and since the IRS receives information from brokerage firms directly as well, theres a good chance youll be contacted if your records dont match what the IRS receives. Because investment firms arent required to submit documentation for their clients until the end of the February, its often a good idea to wait until the beginning of March to file your return to make sure the reporting lines up. If you worked side jobs and earned more than $600 at any one of them in a year, those employers should send you a Form 1099 so you can report that income on your taxes as well. If you left something off your return, you can be pretty sure the IRS will find out about it, said Connolly.
Posted on: Sat, 15 Mar 2014 15:15:59 +0000
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