Red Flags the IRS will be Watching

Blog posted On February 20, 2019

Tax season is upon us and American taxpayers are in the process of filing for returns, receiving refunds, and paying taxes due.  A harmless mistake or deliberate misinformation may lead to your tax return being audited.  The Internal Revenue Service (IRS) chooses taxpayers to audit based on anomalies that are detected in comparison to similar returns.  A taxpayer may also be audited if a relative or business partner is being audited.  The IRS audits returns up to three years old.  If inaccuracies come up, the taxpayer may have to pay a fee, up to $5,000 in some cases.  In other cases, the taxpayer may face criminal charges like tax evasion or tax fraud.

What are the red flags the IRS is looking for?

Excessive Income Deductions

Unless you’ve suddenly become the most generous person in America, it’s not likely that someone earning a $120,000 annual income is spending $50,000 on charitable contributions.  Higher-than-average income deductions is one of the most common reasons taxpayers are audited.  These deductions include charitable contributions, real estate interest, and student loan interest.  To protect yourself this tax season, have your important documents ready to give to your tax preparer, and safely store afterwards.  Legitimate charities will give you receipts for your donations.

Claiming a Loss from a Hobby

The IRS does allow deductions for the expenses related to an income-generated hobby, up to the amount of income earned.  For example, if you sell crafts on your Etsy Store on the side, you can deduct for the expense up to the amount you earned.  Claiming in excess of hundreds of dollars when you only sold a couple mason jar centerpieces will be a red flag. 

Early Retirement Account Withdrawal

You are allowed to withdraw from a retirement account before the age of 59 ½ years old if you are using the money to purchase your first home, may for qualified education expenses, or if you incur emergency medical costs.  If you withdraw from the account for another reason, you will have to pay a 10% penalty plus taxes on the withdrawal.  If you do not report the withdrawal, like 40% of taxpayers who withdrew from the retirement accounts, you will face a fine, especially if you’re a repeat offender.

Sources: MarketWatch