As tax day approaches…
Out of sheer love for the IRS, millions of taxpayers file their income tax returns before Valentine’s Day. Cupid’s arrow must have missed this girl. So, with the tax deadline looming, here I sit, hunched over Quickbooks, and racking my brain to recall what expenses I can legitimately deduct that will not raise any red flags. And unless your love affair with Uncle Sam has you blinded with generosity, there is no reason you should pay more tax than is required either.
But with tax laws constantly changing, and most of us too busy to keep up with our financial law makers, I wish to recap some timely information I received from Forbes Newsletters. For your consideration, the following situations might increase the risk of IRS scrutiny of your tax return.
Be Ultra Wealthy
A no-brainer, yes, but the IRS has finally clued into the theory of potentially uncovering huge dollars by those earning substantially more than the average US Citizen. They have even gone as far as creating special “wealth squads” to monitor their holdings.
Hide Offshore Accounts
It’s not illegal for U.S. taxpayers to have offshore accounts. It’s only illegal not to declare their income. Just ask the convicts, I mean clients, of Swiss Bank giant, UBS.
Fail to file on time – or worse, not at all
If you can’t get it together by April 15th, file an extension. It’s a simple form and buys you a little more time. And let’s be blunt… If you made income, you owe tax, regardless of how it was earned.
Claim huge charitable contributions
If you do, be prepared to supply back-up documentation to the IRS should they decide to question the deductions and contributions that seem extra ordinary.
Omit a portion of your reported income
The IRS uses technology to its advantage and are very good at matching every W-2, 1099, K-1, et al, that you receive with what you claim on your 1040.
Take a large home-based business loss every year
As a rule of thumb, the IRS presumes a Schedule C business losing money three years out of five is not necessarily legitimate. You may be asked to prepare a profit strategy.
Claim a loss on a hobby
By definition, a hobby is not pursued for profit. Grocery expenses for your weekly wine and wisdom gatherings are not tax deductible.
Write off big unreimbursed employee business expenses
They’re only deductible beyond 2% of adjusted gross income and you are not allowed to write off normal work clothes, commuting costs and many other job related expenses.
Take deductions in round numbers
Can you remember the last time you went into the store and paid exactly $100 for an item? Neither can the IRS. You may be subject to an audit by mail and be required to provide paper backup.
Make math errors and simple mistakes
Errors invite scrutiny. Do it right the first time. Double check your math, your social security number, your name, and don’t forget to sign your return! Minor mistakes happen and they are all red flags.
Brag a lot
The IRS will now pay rewards for tips that result in big audit collections. An acquaintance hearing of your expansive claims may soon become a government informant. Don’t forget your ex-business partner, employee or spouse either, as they might be motivated by more than the IRS reward.
When in doubt, use a trusted Certified Public Accountant. It is their duty to keep abreast of the latest tax law changes and will offer the expertise and knowledge that you seek.