Audit RED FLAGS — Be Extra Careful With These!

Hate doing your taxes? You’ll probably hate getting audited by the IRS a lot more.

Your taxes are worth spending extra time and attention on if you don’t want to risk an audit by the tax agency. With news that the Biden administration wants Congress to empower the IRS to audit more tax cheats, it is likely that IRS audits will only be increasing in frequency in the near future. And they can be a real pain.

We want to help you, so here are 13 things you need to pay extra attention to while filing your taxes, if applicable:

1. You earned a lot of money

If you earned a lot, or more than you typically do, that’s great but be aware that the IRS might examine your tax return more carefully than normal. The IRS tends to focus on higher income earners to optimize its limited tax examination funds. Make sure you file accurately if you’ve made some serious cash.

2. You claimed the EITC

If you’re not a high earner, you can still get extra attention from the IRS. Just claim the Earned Income Tax Credit! Although this tax break was created to assist lower- and middle-income earners, it can be a complicated tax break. This is especially true now, after the American Rescue Plan Act expanded the EITC.

As a result of its complexity, many people make mistakes when claiming this credit. This also makes it easier for some people to cheat. Therefore, the IRS is required to hold returns claiming the ITC. Make sure you get this one right!

3. You claimed a questionable dependent

Make sure your dependents meet all IRS requirements. Claiming a questionable dependent will definitely attract IRS attention. One typical issue we see with clients who want to claim dependents is when parents don’t file taxes together. Only ONE parent can claim a child as a dependent and take advantage of the associated tax breaks. This can get further complicated if an adult relative also lives with or supports the child.

4. You are self-employed

Self-employed taxpayers have a lot more leeway when it comes to potentially cheating on their taxes. And the IRS is aware of that. However, the IRS is limited as to what it can actually do in this case — mostly, the tax agency simply has to trust self-employed people. Some excessive deductions which seem fishy will still get you in trouble, though. Moreover, consistently reporting a loss that lowers or eliminates tax liability is also certain to attract unwanted IRS attention. Make sure to report income and expenses accurately if you’re self-employed and don’t want to go through an IRS audit.

5. You are a gig worker

Similar to self-employed workers, gig workers also face some tax troubles. Many are not used to dealing with 1099 income, especially those who turned to side hustles for the first time after the COVID-19 pandemic. (BTW, we’re hiring for a flexible role — check out our Careers page for details!) A tax filer is guaranteed to get a scary IRS notice about unreported income if they forget to include a Form 1099-NEC for jobs paying $600 or more. However, even if the amount is less or is in cash, it’s taxable income and the IRS does have ways of keeping track of it. So make sure you correctly report all employment and other income.

6. You claimed the home office deduction

We encourage our clients to claim this. Please visit our Home-Based Business Consulting page for details on this. This is a legitimate deduction, but it doesn’t mean the IRS won’t take a closer look at home office deductions. This is because of the coronavirus. With millions working from home in 2020 and beyond, it seems natural for these people to claim this deduction. However, as long as you’re an employee and NOT self-employed, you cannot claim it and this tax break does not apply to you!

7. You have rental real estate

Rental properties offer both added cash and better tax treatment. Under the Tax Cuts and Jobs Act (TCJA), rental owners typically enjoy lower ordinary income tax rates that apply to more inclusive income brackets. However, if your rental property generates a tax loss, the IRS may choose to examine your return more closely. If you have rental property, therefore, you should consider working with a tax expert who can help you answer any questions the IRS may pose about your real estate tax claims.

8. You have cryptocurrency activity

With crypto gaining more attention and a top-of-the-form placement for crypto transactions on the Form 1040, you can expect the IRS to look for details about cryptocurrency transactions in your filing. Make sure you report gains or losses related to any cryptocurrency accurately.

9. You have money in overseas accounts

If you have money in a foreign country, make sure it’s reported if required. Violating any rules regarding overseas holdings can result in steep penalties.

If you’re a U.S. citizen living here, you may need to report overseas assets on Form 8938 as part of your tax return. This is different from the FBAR reporting, which is NOT filed as part of your tax return. Look into the rules and ensure compliance with them. Remember that the IRS can find out about overseas accounts despite non-disclosure on your part, as foreign institutions are also required to disclose account holdings by U.S. citizens. You don’t want to put yourself in that situation!

10. You claim large itemized deductions

The TCJA increased the standard deduction amounts, which has resulted in less taxpayers itemizing. However, some taxpayers will find that itemizing is still the more profitable way to go for them. You are expected to deduct LEGALLY, though. Don’t pad any itemized expenses, like charitable donations or medical costs. If the write-off seems unusually large, you can attract unwanted IRS scrutiny.

11. You got tax help for healthcare

The Affordable Care Act (ACA) has been expanded under the latest COVID-relief law. It was already confusing, and it can be more so now, and it can pose an audit issue on top of that. If you get tax help for healthcare costs, pay attention to the premium tax credit (PTC) in particular. Most people get the PTC in advance and this has to be reconciled when filing tax returns. You’ll need to fill Form 1095-A for this. Skipping or miscalculating this will lead to paying an advance PTC amount and potentially, a penalty.

12. Your tax preparer is a fraud

Shady tax preparers go hand-in-hand with tax season. Inevitably, lots of tax preparers set up shop every filing season, looking to make some quick money. These preparers may genuinely not know what they’re doing, but more often than not, they’ll deliberately exaggerate tax entries, ask clients to sign blank forms, or do other such things. It’s important to find a well-established tax preparer so you don’t end up paying penalties to the IRS for someone else’s errors.

13. You did not e-file

Some people still choose to mail in their return. Although this is fine, mailing paper returns increases the odds of mathematical errors and typos. In addition, a paper return is then manually entered into software by IRS employees, which provides another opportunity for human errors. This also provides an IRS worker the chance to identify whether you’ve made a mistake, however. Make sure you check your tax return before filing it!

Although you shouldn’t be scared — after all, most taxpayers don’t set out to intentionally deceive the IRS — it doesn’t hurt to be careful and to have protection in case the IRS does decide to audit you.

If you work with a tax preparer, take the time to make sure you’ve chosen a reputable one! Choosing a tax preparer who offers additional audit protection or audit representation services is also a great idea! At Evolution Tax Center, we offer an Audit Protection Plan to all our tax clients to help them save any audit-related stress. We want to provide true peace of mind to our clients — both during and after tax season. 🙂

If you still haven’t filed this year’s return, what’re you waiting for? There are less than two weeks left! We have a very limited number of appointment slots available — grab one here.

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