Re: Audit Red Flags
- From: "D.D. Pallmer" <ddpalmer@xxxxxxxxxxx>
- Date: Sun, 26 Feb 2006 11:18:16 -0500
Do you guys agree with this? Particularly the part about not attaching a
statement for an unusual situation. Seems to me that an unusual situation
would be best handled with an attached statement, rather than waiting until
the IRS comes asking questions.
"Perry1" <spam@xxxxxxx> wrote in message
news:84d99862e0119e48d35677391a512733@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
www.tinyurl.com/nbuu2
Audit Red Flags
By David Ellis, CNN Money.com
February 22, 2006
Think you know how the IRS picks its audit victims? You may want to
reconsider that notion.
Even most accountants say they don't know how to crack the IRS' audit
formula.
The alternative minimum tax is catching millions by surprise. CNN's
Valerie Morris has some timely tax tips. But with the tax agency auditing
1.2 million individuals last year and the IRS ramping up its enforcement
spending in recent years, experts say it might be worth taking a look at
your return to make sure you aren't making yourself a target for the tax
man.
Overkill on charitable contributions
While giving to your favorite non-profit can be rewarding both personally
and for the tax break, giving to charity could attract the attention of
the IRS, especially if the donation is disproportionate to your annual
income.
And you might even want to think long and hard before you start inflating
the value of that 1982 Dodge Diplomat you donated this summer or the Paul
Cezanne painting you gave to charity, says Jeffrey Kelson, a partner at
the New York offices of accounting firm BDO Seidman.
Many individuals, says Kelson, will overvalue those items and think that
the IRS won't notice.
"You have to be careful if you take large, non-cash contributions," says
Kelson. "You have to back them up with receipts."
Too many deductions for the self-employed
For those Americans that are self-employed or run a small business, the
IRS is really watching you. "That's part of the territory," says Kathy
Burlison, the director of tax implementation at H&R Block.
While filing a Schedule C alone may not be a red flag, the IRS is wary of
these taxpayers since they contributed about $68 billion to the $345
billion tax gap as of 2001.
The tax man knows there is a temptation by self-employed taxpayers to blur
the distinction between personal and business expenses, such as a mileage
deduction on your car or calling that room in the basement of your home
your office.
But don't think you're fooling anyone with that trick, says Burlison. In
fact, the IRS will probably size up your expenses relative to your
business to make sure your return is honest. "Those are areas that the IRS
tends to be more concerned about being abused so they are more likely to
be audited," she says.
Above-average deductions
Martin Kaplan, a certified public accountant and the author of "What the
IRS Doesn't Want You To Know," says that the IRS is also closely looking
at unusually high deductions.
If you earned $100,000 from your day job, but gambled in the real estate
market this year and claimed a $40,000 loss, you might become audit
material. "The [IRS] computer definitely generates a much greater amount
of audits based on categories where incomes and losses are offsetting each
other," says Kaplan.
At the same time, the tax man will weigh the deductions and expenses on
your return against other taxpayers in your income bracket (see chart).
While you might not be able to do anything about that $20,000 medical bill
or the inheritance you received from a departed relative last year, if
your deductions or expenses tend to be higher than normal that could raise
a red flag.
Making six figures
It may not be promising news for those individuals on the higher end of
the tax strata, but believe it or not, if you make over $100,000 a year,
that could draw some attention to your tax return.
During the fiscal year 2005, audits of taxpayers taking home over $100,000
annually reached 221,000, double the number in 2001.
And if that's not enough to convince you, in November, IRS Commissioner
Mark Everson said in a statement that the coverage of this category "still
too low".
According to tax experts, those individuals are lucrative targets for the
IRS. "They are focusing on taxpayers making $100,000," says Kelson. "They
want to get a return on those returns."
Careless omissions
Kaplan, who has served as a certified public accountant in New York City
for the past 35 years, also stressed the importance of keeping your return
as neat and slim as possible.
That means filing electronically instead of handwriting your return and
avoid attaching out any unnecessary forms to your tax return. "If there is
a need for additional info they'll ask for it," says Kaplan. "You're
trying to avoid someone putting hands on your return."
But maybe the best advice, says H&R Block's Burlison, is to provide as
transparent a return as possible. "The number one thing to avoid contact
from the IRS is to make sure you report everything."
.
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