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Deductions That Raise Red
Flags With The IRS
Let's face it. Audits are no fun. And it's a fact of life that
taking some deductions are given more attention by the IRS and increase your
chances of being audited. Here are a few of them:
You might cause undue attention from the IRS if you itemize deductions and take
the standardized deduction. You definitely would cause attention if you declared
more individual deductions than could be justified by the size of your immediate
family or tax circumstance. Let’s say that you were only 64 years old and
claimed two additional standard deductions for being 65 years old and blind. The
red flag will rise higher when the IRS auditors discover that you are neither
blind nor 65 years old. You might raise the attention of the IRS if you were a
nonresident alien and claimed the standard individual deduction. However, you
could be an illegal alien and claim the standard deduction if you had stolen the
identity of a bonafide American citizen. The Social Security Administration
claims that it cannot divulge duplicate or suspicious social security account
activity to the IRS. You will attract hostile attention from the IRS if you are
married filing separately and claim the standard deduction when your spouse has
itemized individual deductions on their tax return. You could garner undue focus
if you claimed a standard income tax deduction after you changed your annual
accounting cycle especially if your tax return happened to be less than twelve
months.
If you decide to itemize deductions rather than take the standard tax deduction,
you would gain the IRS’ adverse interest if you deducted your purchase of
over-the-counter nicotine gum as a medical expense. Add the fact that you also
included the cost of your diet food as a valid deduction to this years’ tax
return then they surely will be calling or at least writing you. If your spouse
dies and you deduct the cost of their funeral from your taxes, you will be in
great distress when the IRS calls. If you claim all medical expenses rather than
deducting only those that exceed 7.5% of your annual adjusted gross income, you
might be in trouble. However, if you are self-employed with a net profit, a
partner or a share holder in an S corporation you can deduct 100% of the amount
you have paid for medical insurance for yourself and your dependents. However,
if you desire to irritate the IRS and cause yourself grief, please also claim
all of your life insurance policy premiums!
More attention can be accumulated by you when you declare the amount of real
estate taxes withheld from your mortgage rather than the tax paid on your home
or real estate as a deduction. This is sure to incur the wrath of both the
state, county and city in which you live. Other illegal things you can do are;
deduct the points that your home accrued during the year after you have obtained
a separate loan to pay them or live less than 14 days in your second home but
claim the home mortgage interest as a deduction for it.
More things you can do are, declare personal interest as a valid deduction,
claim personal items “stolen” which are in reality only misplaced or lost, fail
to complete Form 4684 along with your tax return when declaring stolen goods or
neglect to seek insurance compensation for your loss. These are but a few red
flags which will stir the IRS hornets. There are some really good areas of abuse
which have been tightened, thank you IRS and “whoever” advises Congress. Those
places, that vastly improved, were charity contributions, fire loss and theft.
Those of you who might want to cheat the IRS of any rightful tax should rethink
this since they, the IRS, are extremely smart. It will be a difficult and
frustrating task should you attempt it. Please note that I have addressed only
“red” flags which only irritate the IRS and cause you unnecessary delay in
preparing your tax return correctly. Hopefully after reading this article you
will read the Schedule 1040 carefully and follow the tax laws.
Still want to know more? Well here's 8
more items that will get higher scrutiny at the IRS:
1. Higher Income Tax returns probably those
above 100 grand are more likely to get audited because there is more tax money
at stake. It's not really fair that you're under higher scrutiny for
making more money, but that's the way it is.
2. If your income this year has gone considerably higher from previous year it
may trigger a red flag at IRS and the chances of getting audited becomes more.
3. Claiming $6000 on business meals when the average for your tax bracket is
around $1,600.
4. IRS pays more attention to the filers who claim home business in addition to
their regular salary income or if you claim excessively high deduction.
Remember, the room has to be exclusively used for business office purpose. You
cannot put a desk in the corner of your home and claim it as a home office. The
best way to avoid this is to measure the portion of the home you are using for
business and calculate the percentage with respect to the total area of your
home. Suppose if you get 20%, then you can only deduct 20% of your mortgage in
your tax returns. Another important point to keep in mind is that if you incur
losses year after year in a home business which is your hobby but not sole
propriety and when you report them on Schedule C, you are once again prone to
get audited, so stay as far as away from Schedule C, as the Schedule C Filers
are among the most likely people to get audited.
5. Income like investment returns etc. if it is not reported can trigger off an
audit. Also income other wages not reported will most likely increase the
chances of getting audited.
6. Non-cash charitable tax donations are under the scanner now, the IRS now
needs the receipt of the transaction or the bank statement showing the
transaction of the donated non-cash item. If you fail to do that, it can again
be an audit alarm for you.
7. Watch out when you are claiming casualty losses, claiming large casualty
losses could result in an audit. And the important point that should be noted is
that the casualty losses should only be due to uncertain and sudden causes like
fire, theft, and tornado or hurricane damage. Losses occurring due to slow
wearing down of conditions do not qualify.
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