Who knew that having a vindictive ex or rounding-off figures on a tax return could get you audited by the Internal Revenue Service?
As you recover from tax time, be aware that there are some little — and not so little — details that could make the IRS decide to pay you a visit.
Here are six “red flags” that could prompt Uncle Sam to audit you or your small business.
1. You earned more than $200,000. According to the IRS, it audits fewer than 1 percent of individual taxpayers with annual incomes under $200,000. That number triples for individual taxpayers with annual incomes of more than $200,000. If you make more than $1 million a year, your chance of being audited increases to 12.1 percent.
2. You failed to report all of your taxable income. There will always be a few people who try to beat the audit lottery. However, the IRS scrutinizes cash-based businesses (such as restaurants and retail services) and the self-employed (such as lawyers and independent contractors). Although it’s possible to get away with not reporting tips and other cash earnings, there’s also a chance of being caught. The IRS looks over all filings, including those from vendors and employees, and sees if they match up to what you have reported, according to New York Daily News.
3. You filed a Schedule C. The IRS always looks over the Schedule C filings of small businesses, especially if your gross income is $100,000 or more, says David Wolfson, a certified public accountant and partner at Schulman Lobel Wolfson Zand Abruzzo Katzen & Blackman. Those filing a Schedule C are five times more likely to be audited than those who do not — so if you file a Schedule C be sure to have documentation.
4. You took the “tennis court” deduction. Many small-business owners fret about taking a legitimate home-office deduction, but they shouldn’t. What the IRS looks for is obvious deduction abuse, such as what’s known as the “tennis court” or “swimming pool” deduction. This ridiculous claim occurs when people try to deduct building a private swimming pool or tennis court. It’s also a big red flag to the IRS that you are trying to game the system. (Although a home office deduction is often called an audit risk, TurboTax says this isn’t the case. Taxpayers should take the deduction if it’s legitimate and the home office space is used 100 percent for business.) Other crazy deductions include an “office” subscription to Playboy or “protective clothing” from Victoria’s Secret.
5. You rounded off your figures. Believe it or not, figures that are a bit too neat or rounded to the nearest $100 or $1,000 look suspicious to IRS agents. “Having a return with a lot of zeros on it may be a cause for a return to be pulled,” John Lieberman, a CPA at Perelson Weiner, tells CNN. Don’t give the IRS the idea that you are guessing. Use exact figures. One exception: Rounding to the nearest dollar, as tax-prep software and accountants do, is an acceptable practice.
6. You have a vengeful ex-spouse or associate. If you went through an ugly divorce and your ex-spouse is still unhappy, he or she may report you to the IRS whether it’s true or not, according to Forbes. In many cases, it doesn’t even have to be an ex-spouse; it could be a disgruntled employee or someone else looking for a Whistleblower Award. If you’re in the middle of any legal issue, keep your tax return clean as a whistle — just in case the IRS decides to investigate the report.
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