Sometimes we don’t think twice about claiming a large work-related entertainment expense or writing off gas expenses for work trips. But there are specific rules for these expenses and many others that could exclude them from being legitimate tax write-offs, therefore increasing the chances of your tax return being red flagged. Everyone’s situation is different, so it’s advisable to know the rules and do your homework at tax time.
Self-preparers typically process tax returns using a program such as Turbo Tax, making it less difficult to slip up as the program is designed to catch errors. Similarly, the IRS processes most returns using computer programs designed to flag anything out of the ordinary. If an item is flagged, the IRS takes a closer look at the tax return and it increases the possibility of an audit.
While less than a percent of tax returns were audited last year according to Kiplinger, there is always that chance yours could be picked from the pile. There are common things that the IRS looks for when scanning returns. Take these tips into consideration while completing your tax return to rest easier, avoid being red flagged and fly under the IRS radar:
• Missing Information – If your tax return has errors or missing information and the IRS computer can’t process your return, it gets passed on to IRS employees for a closer look. Double-checking information can avoid a second set of eyes on your return.
• Large Charitable Contributions – Donating to charity is admirable, however if your annual salary is $50,000 and you’re claiming $10,000 in charitable donations, you will increase your audit chances. Get all donated items appraised and keep the appropriate paperwork.
• High Income – If you’re an average earner with an easy tax return, you likely don’t have much to worry about. Those who earn over $100,000 per year are much more likely to be audited. Kiplinger states that those with an annual income of over $200,000 actually have a 1 in 37 chance of being audited.
• Business Deductions – Having lunch with a former coworker on a Hawaiian vacation doesn’t make it ok to write off part of the trip. Business deductions must serve a purpose that includes attempting to make a profit and full documentation is needed. Large write-offs for travel and meals raise red flags immediately.
• Claiming Dependents – You and your ex-spouse can’t both claim a child as a dependent in the same year. Make sure you’re on the same page to avoid unnecessary red flags.
• Failing to Report Income – If you don’t report taxable income from interest or part-time jobs, your tax return could be flagged. The IRS receives copies of W2’s and 1099’s so matching forms and reporting everything is essential.
• Small Businesses – Claiming a home office and filing a Schedule C can easily raise a red flag as the IRS keeps a closer watch on small business owners. A home office must be exclusively used as a work room.
• Rental Losses – Real estate rental losses can be written off in certain cases, but make sure you know all the rules as the IRS is paying closer attention to these write-offs.
• Game Winnings – Large amounts won from gambling, horse racing or sports betting must be reported. It’s likely that the organization or casino reported the winnings so make sure to include winnings on your tax return.
Lastly, make sure you have supporting documentation for everything on your tax return. By all means, take every deduction you’re entitled to, but stretching the truth is not worth the risk and double-checking rules and numbers is always recommended. If you have tax questions or would like a complimentary consultation, contact Andrew Rafal of Bayntree Wealth Advisors and his team of professionals at questions@bayntree.com
*Bayntree Wealth Advisors does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation
Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
