How to Draw the Attention of the IRS:
For millions of Americans, the prospect of having the IRS audit your tax return is enough to cause your stomach to tense, blood pressure bump upward, and palms grow a little clammy. While none of us wants to or should pay Uncle Sam a dollar more than we owe, none of us ever wants to be among the roughly 1% of Americans this year summoned by the IRS to justify our tax calculations either.
So how do you minimize your exposure to the IRS? Understand this: the IRS usually doesn’t just choose names like a blindfolded executive drawing names out of a hat at some office party. There are red flags that tax-payers raise in filing taxes, red flags that cry, “Pick me! Pick me! Pick me!” And just as you perhaps inadvertently hoist those flags, you can also consciously lower your taxpayer’s profile and minimize your chances for an audit.
Consider the following principles:
1. Higher Income Draws Closer Scrutiny.
Reporting more than $200,000 in income will automatically hike your chances of being audited from 1.11% to 3.93%. No one advises you to earn less, and yet tax law allows for methods to reduce your reported income. Take full advantage of the “Income Adjustments” on page 1 of your Form 1040 to squelch the size of your adjusted gross income even before you reach for Schedule A deductions.
2. Failure to Report Income Is Like a Red Flare.
The IRS receives copies of all of the W-2’s and Form 1099’s that are delivered to you, so omitting reported income is simply foolish. Don’t do it.
3. Higher Deductions Draw Attention.
The IRS takes into account the median deductions for categories like medical expenses, charitable contributions and taxes. If you fall outside this range, it raises a red flag.
4. Be Careful When You Estimate!
The word “estimation” implies questions about the value of reported transactions. Whether you’ve donated property to a charitable organization or are calculating a business deduction for your office at home, you need to have the documentation to substantiate your deductions.
5. Home Offices Are a Red Flag All by Themselves!
Like any good business, the IRS is going to concentrate on those areas that, over history, have proven the most lucrative. High, high on that list are home office deductions which, very often, the IRS can chop down considerably. Understand this: a legitimate home office claim can include a portion of your rent or mortgage, real estate taxes, utilities, phone bills, insurance, even relevant landscaping -- IF AND ONLY IF you use claimed “office space” exclusively and regularly as your principal place of business. If you take the home office deduction, be prepared for scrutiny.
6. Watch Your Business Expenses!
Entertainment, travel and auto, meals and other business expense are as commonly abused in the private sector as they are in government offices. This is fertile ground for the IRS, and they know it -- especially among self-employed individuals. The law prescribes that you hold receipts for any such expense of $75 or more and that you record the amount spent, place, names of people present, and the business purpose of any cited event.
7. Report Foreign Bank Accounts!
Want to get into deep trouble? Try to conceal from the IRS a foreign bank account or financial activity conducted overseas. It’s the nature of our world now that banks, here and abroad, are forced to report more and more detailed information, and, in recent years, the IRS has made it a high priority to research the overseas assets and activity of citizens parked here at home. Penalties in this area are among the most stringent.
Sources: 1. “IRS Audit Red Flags: The Dirty Dozen” Kiplinger.com. 11/14/12 2. KFMR Certified Public Accountants & Business Consultants. “Average Itemized Deductions” Financial Fitness Special Edition. KFMR.com. 12/1/12. 3. Perez, William. “Tax Planning Basics: 3 Ways to Reduce Your Taxes” About.com.
Investment advice is offered by Horter Investment Management, LLC, a Registered Investment Adviser. Insurance and annuity products are sold separately through TWP Financial. Securities transactions for Horter Investment Management clients are placed through Pershing Advisor Solutions, Trust Company of America, Jefferson National Monument Advisor, Fidelity, Security Benefit Life, ED&F Man Capital Markets and Wells Fargo Bank, N.A.