Are You Provoking A Tax Audit?

Every taxpayer fears an Internal Revenue Service (IRS) audit. Visions of additional taxes, fees, and penalties are enough to make anyone dread an IRS audit as much as a root canal. In addition to the potential financial ramifications, audits also consume taxpayers' time and energy, and most of us are busy enough already.

As such, it makes sense to prepare your tax returns in a way that minimizes IRS scrutiny. Once the IRS flags a return, they look for anything they can dispute, even if it's unrelated to the original reason for the review. To lessen the chances of provoking an audit, use the strategies below when claiming charitable deductions, earning high (and low) income, claiming rental property losses, depositing cash, and reporting self-employed income.

Charitable Contributions

Charitable contributions provide a lifeline for many people and organizations in need. In fact, many charities perform essential social functions with no financial profit. Without these charities, the government might have to pick up the tab, so it makes sense for the IRS to provide tax deductions for charitable giving. To spot taxpayers who exaggerate their charitable contributions, the IRS uses a formula to compare income to the number of charitable deductions, and when contributions exceed a certain level, the IRS flags the return.

To avoid provoking an audit, fill out form 8283 for any non-cash donations exceeding five hundred dollars. Also, avoid the temptation to exaggerate the value of non-cash contributions. The deduction is always for the item's sale value at the time of the donation, not what you purchased it for. Keep this in mind when valuing deductions for items given to places like Goodwill Industries. A donated vehicle, for example, should be valued at what you could sell it for, not the dealer price. You must also keep receipts for all cash donations over 250 dollars, though the best practice is to keep all cash donation receipts for three years.

Continue reading to learn about earning too much or too little.

Earning Too Much Or Too Little

Most individuals agree it's better to have money than to be broke, but when tax season rolls around, it can feel like the opposite. The IRS puts most of its auditing resources into high-income returns. Twenty-seven percent of returns with over ten million dollars in income face auditing, while incomes between five million and ten million dollars come in at eighteen percent, and returns between one million and five million dollars are audited at a rate of nine percent. The overall average stands at less than one percent.

If you make big bucks, experts recommend keeping good records and getting the help of a tax advisor. The IRS audits both those it views as earning too much or too little. It reviews returns when the reported income appears below what the IRS calculates taxpayers should be earning under their living circumstances. For example, a single mother who made eighteen thousand dollars per year was audited because she lived in Seattle and the IRS calculated she needed a minimum of thirty-six thousand dollars annually to get by. To the IRS, this smelled of undeclared income, but n her case, there was no undeclared income, and she saved money by living with her children at her parent's house.

Continue reading to reveal how rental losses work when it comes to audits.

Rental Losses

The IRS scrutinizes returns with this deduction because the requirements are difficult to meet and tax auditors know they have a high chance of success in disallowing this deduction. Regulations require taxpayers taking this deduction to be either real estate professionals or active participants in the property rental. Individuals who own properties and have a real estate agent or management company handle the business of renting may be excluded.

If you own a rental property and take this deduction, prepare to justify "active participation." Taxpayers should also be mindful of income limits. This deduction starts to phase out when incomes reach 100,000 dollars and becomes unavailable when they surpass 150,000 dollars. Real estate professionals, such as brokers, agents, and landlords, can deduct rental losses without limitation provided they spend at least fifty percent of their time and 750 hours per year managing rentals.

Continue reading to learn how being self-employed can trigger an audit and how to handle it.

Self-Employed

Employee-taxpayers have a W2 to verify their income independently, and it is for this reason, the IRS is unlikely to audit the returns of employed individuals unless the numbers don't add up. Most self-employed people use Schedule C to report their business income or losses, and because there is no third party to verify the accuracy of Schedule C income and deductions, the IRS views self-employed returns with some skepticism. In fact, returns accompanied by a Schedule C are three times more likely to face an audit. The IRS pays particular attention to business-expense deductions that appear to actually be personal expenses, as well as signs of unreported income. If you have proper documentation, legitimate deductions stand up in an audit, and due to this, self-employed individuals should always keep their documentation for at least three years. If your income is high and the tax situation complex, hire a tax advisor, as chances are high the IRS will come knocking one day. The auditor may choose to review the previous three years and flag you for an automatic audit next year.

Continue reading to reveal the details on cash deposits next.

Depositing Cash

Large amounts and numbers of cash deposits never fail to get the IRS's antennas up, as cash businesses and individuals paid in cash are known to underreport income frequently. Some cases may come down to lax accounting management, while others involve "skimming" a bit off the top to reduce taxes. Egregious cases involve sophisticated tricks to hide profits and can constitute tax fraud.

To avoid triggering an audit by depositing cash, make certain all of your entries into the accounting system match your cash intake. If this is too complex, consider hiring a tax accountant. IRS auditors also look at a business's or individual's entire return and situation in light of the cash deposits to determine if income might be hidden somewhere. When they see a red flag, they audit, so always keep records that show you reported all income from depositing cash. However, even if you can prove you reported all income, IRS auditors rarely give up there. They need to collect something to justify their time, so they will look for other errors on your return and try to dispute deductions, if possible. Be ready to justify your position on every deduction.