LOOKING INTO THE FUTURE

That’s right. Only 43(ish) days to fill out those tax forms and submit them to the IRS so you can close the cover on the book of 2022.

And, of course, there are many who might benefit by filing an extension. More about that in the next few weeks. And remember, Corporate, Limited Liability Companies (LLC), and certain partnerships must file by March 15. That’s why an extension might be in order!

If you decide to go it alone, though, I want to broach a topic that you’ll want to keep front and center as you tackle those tax forms: getting audited (and avoiding it). It’s a common occurrence and with more funding for the IRS, they’re getting more focused on tax compliance than ever before.

While nothing guarantees you won’t get audited, there are certain things that do get the IRS audit radar beeping. Let’s take a look…


Janet Behm's
"Real World" Personal Strategy Note
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What Makes You an Audit Target?
“The opera reminds me of my tax audit. It was in a language I didn't understand, and it ended in tragedy.” - Jeff MacNelly

Some kinds of attention are good… but not all kinds. For example: What might catch the attention of IRS auditors?

Some audits are done just at random (so they claim) — but some deductions, filings, and assets shine brighter on IRS radar than others.

Here’s an overview of the latest potential tripwires for a federal audit.

‘I didn’t know’

1. Data errors. There are mountains of information flying around out there now, and it only takes one numeral in the wrong place to make the IRS computers flag you. Common red flags include using the wrong filing status (Single, Married Filing Jointly, and so on), Social Security numbers that don’t match, or just plain old bad math.

Related to this can be eye-catching “significant inconsistencies” between your past tax returns and your most current one.

2. Failure to file. This isn’t a bell you want rung via an audit — check with us and we’ll help you get up to date with filing your past returns.

3. Unreported income. The IRS gets copies of your 1099s and W-2s, so never think that your side money won’t get reported to the IRS. This means you have to declare it and pay income tax on it if you haven’t already.

By the way, you may have heard that you were going to have to report even tiny amounts of money you made in 2022 from places like eBay. It turns out the IRS put this off a year. But you do have to report money from the gig economy on your tax return, even if the income is from part-time, temporary, or side work, and even if it wasn’t
reported on a 1099, W-2, or other income statement. And yes, that does include tips.

(Also gambling winning — another audit red flag.)

4. Unusual avenues of income. If you work in a structured business partnership or are an active member of a limited liability company (among other scenarios), you might have special obligations to pay self-employment tax ("I didn’t know" …
doesn’t carry much weight with IRS auditors, in case you wondered). The IRS has been paying more attention to arrangements like this in recent years and has pledged more scrutiny on six-figure taxpayers in general.

5. Give and it hurts. Life might be easier if the IRS was stupid, but they’re not — and they know the average charitable donation for each income level. Not to mention that you can’t take a tax deduction for charitable donations unless you itemize on your return. (If you do itemize, you can deduct up to quite a chunk of your income — just realize that Uncle Sam will eventually notice. For a large non-cash donation, file IRS Form 8283.)

Here’s one good general rule to avoid audits, no matter the source of the money: If the IRS hasn’t got the paperwork to match large transactions of any kind that you’re claiming, Uncle Sam might well have questions...

6. Not just business.
People have tried to write off everything from fishing boats to lingerie as legitimate expenses of their business — with amounts of success both predictable and surprising. (One junkyard owner was allowed to deduct the cost of cat food because he had a rat problem.) There’s one huge red flag here: Taking a loss on a deduction-filled business too many years in a row. In auditors’ eyes, it becomes a “hobby” that’s unentitled to write-offs.

7. Certain credits. It doesn’t seem fair (because it isn’t) and the IRS may deny it, but claiming breaks like the Earned Income Tax Credit and the American Opportunity Tax Credit might draw attention to your return. It’s not the fault of you or the credits themselves, it’s just that too many crooked tax preparers have used these to inflate tax refunds for unwitting clients.

If you deserve these credits, apply for ‘em.

8. Cryptocurrency. Every year recently, the IRS has expanded the question that’s suddenly right on the top of Form 1040: At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

As an issue of tax enforcement, this is still in its infancy… but expect a lot more attention to crypto wheelers and dealers in the future (including audit attention).

Time on your side?

Not so much: The IRS generally can go back three years to find trouble in your returns. Longer even, if they find something interesting …

Most audits are started — and completely resolved — by mail.

If you get an audit notice, do two things:

1. Contact your tax preparer immediately.

2. DO NOT IGNORE IT. That is the ultimate red flag.

BE THE ROAR not the echo®
Janet Behm