10 IRS Audit Flags

EP 60 - 10 IRS Audit Flags

[00:00:00]

Have you ever wondered what common mistakes could land you in the hot seat with the IRS?

Well, we received this message the other day.

Hey, Ralph, I was talking to a friend at work, and she told me that her husband said that the IRS has a list of things they look for when people are filing their returns. I think she said it was some sort of watch list or something. She said her husband always looks at the list to make sure when they prepare their returns, they avoid these items.

Is that even true? And if it is, do have the list? I just don't want to get audited, that idea really scares me. So any help would be greatly appreciated. By the way, I love the podcast and especially your Funny Wednesday shows. I was listening the other day at work, and one of my co workers wanted to know what was so funny, so I told him about your show.

Hopefully, he will become another loyal listener. Anyway, thank you and God bless.

Have you ever wondered what triggers an IRS audit? We'll stay tuned as we uncover the secrets to mastering your finances while staying in line with your Christian values and [00:01:00] hopefully. Avoiding an IRS audit.

Welcome to another episode of the Ask Ralph Podcast, where we dive deep into the world of personal finance with a Christian perspective. Today, we're going to cover the top 10 IRS audit triggers. This is our Thursday edition. As you know, on Thursdays, we do tax talk Thursday. So let's start at the beginning.

Understanding what an IRS flag is.

Folks. These are just simple things that the IRS looks for. The things that you should try to avoid when you file your tax return. They basically compile a whole list of [00:02:00] these things. So let's jump into this. These are the 10, most common. IRS audit flags. And at the end, we're going to talk about how to avoid them.

So here's audit flag. Number one.

**Suspiciously high deductions. when you file your tax return, the IRS has software where they look at your return based on the other returns in the database. And excessive deductions relative to your income can raise red flags. if you have $50,000 of income and you claim you gave $40,000 in charity, it's probably going to raise a red flag. So you need to ensure that your deductions are accurate and most importantly, supported by proper documentation. So avoid these suspiciously high deductions.

Let's move on to flag number two. And that's **mismatched information. This is pretty simple. Whenever you work for somebody or you get interest from the bank, they file a report with the IRS. So when you file your tax return, the IRS matches that information against the information that you provide. So discrepancies between the information on your tax return and the [00:03:00] data reported by these third parties.

Like I said, such as financial institutions, or your employer can trigger audits. So it's important that you always double check. All the details when you return. frequently in my practice, clients will come in and say and Ralph, I can't find this document. Can we just skip it? You know the problem with skipping it is then you're going to end up getting audited by the IRS.

Now it might not be a full fledge audit where they show up at your home or at your office, but they're going to send you a letter and say, Hey, by the way, Sally, you forgot to put this on your tax return. Unfortunately, I've seen that trigger cause a deeper dive. So you want to avoid that?

So let's move on to number three. And that's **home office deductions. This is when I see a great deal of in my practice.

 it's difficult to deduct these anymore with the changes to the standard deduction, but home office deduction claiming home office deductions without meeting the IRS criteria can attract scrutiny. You need to familiarize yourself with the rules now. Here's the deal. The home office deduction is available.

If the area is used exclusively for [00:04:00] business. And when I used the word exclusive, that's what they mean exclusive. It's not a part-time thing. I can't take a deduction for my dining room. Because occasionally I set my laptop up there. And do some work. That's not going to work for the home office deduction.

So you want to avoid that red flag.

Let's move on to number four. And that's **large charitable deductions. Now I have a personal story for this. I had a client it's probably been 15 years ago. I came in to get their taxes done. And she was actually a minister and she had converted her house. To a place of worship, which was totally appropriate.

It was no problem. And when I was doing her tax return, I took a look at this and I said, all right, well, she had $30,000 worth of income. But over $150,000 in deductions. Well, I said to her, I said, listen, Just be prepared. This is going to get flagged by the IRS and sure enough, it did. And it wasn't complicated.

We just had to show that she literally gifted. Her home. To the church. So it was a legitimate deduction. Now she couldn't take that on one year because there's a limitation on how much you can [00:05:00]take, but you gotta be careful on these While charitable giving is commendable. I agree with that. Usually large donations without proper documentation may invite IRS attention. So you want to keep detailed records. another thing I see in my practice quite frequently. Is the deduction for giving stuff. Goodwill or salvation army, and the thing you need to be aware of with that. Is, you have to have a receipt.

You have to prove what you gave. And also if that is going to amount to more than $5,000 in a calendar year, You've got to get those items appraised and that surprises a lot of people when they come in and get their taxes done. They'll say to me, Ralph, you know, we donated. A whole house of furniture. My mother passed away and we donated all of her her over clothing and it was worth a lot more than 5,000.

I get it. But unfortunately, you've got to get an appraisal on those things by an IRS certified appraiser. So avoid that red flag of those large, charitable deductions.

Let's move on to number five. Number five is **self-employment income. This is a huge red flag. Self-employment individuals at a higher risk of [00:06:00] audits due to the potential for under-reporting income. Again, I'm going to stress this.

You need to maintain records of all self-employment earnings. I think I've hit this before in a few podcasts, if you're working in the gig economy or if you're, self-employed doing whatever you're doing, you got to make sure you're reporting all of your income. If people are using cash apps or people are using Venmo or any of the other, I think I can't think of all the names, but there's a bunch of them out there.

You need to make sure you report in to, and more importantly, here's the thing that most people don't think about. Whatever is getting deposited to your bank account better, be shown as income on your tax return, unless you have an explanation otherwise, cause it's, it's a dead. Loser and an IRS audit, not something they're looking for.

Let's move on to number six. Number six is cryptocurrency transactions.

Now a lot of people I have to ask every single taxpayer this, if they had any **cryptocurrency transactions, because the IRS is really cracking down on it. Most of them look at me like what in the world are you talking about Ralph? This is Bitcoin or any kind of the [00:07:00] online currencies.

The IRS has increasingly scrutinizing cryptocurrency transactions. So it's important that you report all cryptocurrency gains and losses accurately to avoid audit triggers.

Now, the companies that you use to keep track of your cryptocurrency should be providing you with a report so that you can give that to your tax person, or you can report that on your tax return. It's very important. And again, that's not ordinary income and it gets a little bit into the weeds, but it is capital gains.

So let's move on to number seven and that's **unreported income. this is what I call the Al Capone situation. Failure to report all sources of income, such as side gigs or investments, can lead to audits. You need to be transparent about your income sources to prevent discrepancies. again. I mentioned this a few moments ago. If people are paying you to do work, you need to report that income.

I'm not the world's policemen. But this is a surefire audit trigger. Because if the IRS looks at your return, Or if they look at your bank account, they look at these cash apps and all these other places that reporting income you're [00:08:00] going to lose. It's a definite loser.

Let's move on to number eight. Number eight is **frequent business losses.

And I can't tell you how many times I've dealt with this. I have some clients that they set up these small businesses and all they do is lose money. And I get it. I get what they're doing. They're trying to write off things that really aren't profit. Driven so consistent business losses year after year may raise suspicions.

Well, of course it does. The IRS basic position is you have to be in this business to make money. There has to be a profit motive. If there is not a profit motive, they will call this a hobby. If you get ridiculous with it, they'll call it fraud. they'll put you in jail for that. You need to implement sound business practices and seek professional advice to avoid audit flags.

It's really important. If you're going to have a hobby, then we use it as a hobby. you can write off expenses up to the amount of income you just can't drive it negative.

Let's move on to number nine. **Claiming rental losses. This is one that I see a lot of my practice as well, because [00:09:00] the truth is. And I probably don't mention this enough, but most of my clients in my practice have more sophisticated or. More complicated tax returns. Well deducting losses from rental properties without meeting IRS criteria can attract audits. It's absolutely important that you comply with rental property tax rules to mitigate audit risks. now. There are limitations based on your income to deduct these rental losses.

And that's probably something we'll cover in another podcast. But you need to make sure you're keeping meticulous records. If someone is paying you rent. Even if they're paying you in cash, you need to report that income. You can't just take a loss and say, well, you know, I had this rental property all year and I paid for this repair, a paid for that repair. And you don't report any income.

The IRS is going to say, wait a second. what are you stupid? You know, w what are you doing? I give, are you a charity? So you need to pay attention to,

and number 10, and this one cracks me up. Every time I hear about it. And that is **round numbers. Now you might think you're being slick or you might think you're being cute and doing this. But rounding off figures on your tax return may seem convenient, and it might, you know, simple.

Oh, okay. Well, [00:10:00] what did I, I have clients come in all the time. They'll say I have a small business, Ralph, I fixed small engines. Uh, and I'll say to them, well, how much did you spend on, maintenance and repairs for your machines? Oh, a $200. Well, how much did you spend on office supplies?

Oh, $150. how much did you spend on telephone? Oh, $300. Well, That's a surefire way to get the IRS to look at your return because nothing costs exactly that on that level, telephone bill is $64 a month. your repair and maintenance is going to end with change. So if you round off figures, you're going to cause yourself a problem.

 You've got to provide precise amounts to prevent audit triggers.

Now I've told you about 10 audit flags.

Now let's put some useful information about how do you avoid them.

The number one thing you can do. And I can't stress this enough. **Maintain accurate records. This is the key folks. Keep detailed records of all financial transactions and receipts.

It's really that simple. If you have something that's financial, keep a receipt for it. Keep [00:11:00] a record of that.

Number two. And this is another important one. If you're outside of your comfort zone, **seek professional guidance. This is what I do for a living. Consult with a tax professional or a financial advisor to ensure your compliance with the tax laws and regulations.

It's not simple. If you've got something complicated on your tax return, like we talked about. Let's say you have a small business. Let's say you have a rental property. let's say you deal with cryptocurrency, those things aren't simple to handle, and you might get yourself in trouble using one of those online tax offers .

We talked about that a couple of days ago. This is a time when you want to consult with a professional.

Here's number three. Guaranteed way to prevent problems. And that has **review your return thoroughly. Listen before you filed this return and most people are filing these electronically. Look at the screen, look at the things that it's reporting.

You look at the summary report and make sure you've double checked your tax return.

Make sure there's no errors. Make sure you've reported all of your income. You can't rely on this software. Sometimes you might [00:12:00] put it into screen A, but it doesn't go into screen B. And then all of a sudden you're reporting this return. And you've missed something.

I've seen that so many times I fixed so many returns that's happened to. It's ultimately important that you review it before you click send.

Number four, **stay informed. you don't have to become a tax expert like me, but stay up to date with tax laws and changes to make informed decisions and avoid potential audit flags.

Like the lady mentioned in her voicemail. this lady's husband pays attention to that, and that's something you need to do. Or you pay somebody like myself and you don't worry about it. You say, look. I'm going to go see Ralph. And while I'm talking about that, If you're looking for tax assistance, I do taxes in all 50 states.

 zoom has opened up. The way for us to communicate no matter where you are, you can go to askralphpodcast.com/store, and you can book an appointment with me if you feel comfortable working because you've listened to the show, I'd be happy to help you.

And number five. And this is one that we're mandated to do, and that is **file electronically. E filing your tax return can reduce errors and processing time.

Why? Because [00:13:00] it double checks some of the obvious things it's going to make sure that your name and social security match up. It's going to make sure that all the I's are dotted and T's across. Now. It's not infallible. There are still ways to make errors on an e-filed return, but. It's definitely a step forward.

So I hope this was helpful. And we talked about the top 10 audit flags and we talked about five things you can do to avoid them again, let's go over to five things you can do to avoid, maintain accurate records. Seek professional guidance. Review your return thoroughly stay informed and file electronically.

So before we wrap up, I want to remind all of you. You can find out all this information on our podcast page at askralphpodcast.com. You can leave us a review, there. You can also share your thoughts, or send us a message

like this lady didn't, maybe you'll be on our show. Make sure you also, while you're there join our email list right now, we're running a special where everybody who joins every week, we're going to have a $25 Amazon gift card drawing.

So sign up yourself and if you know, somebody that would benefit from it, have them sign up as well. And like I said, you can [00:14:00] also schedule an appointment with me for a consultation.

If you want to talk about something we talk about on the program, something that you're going through with your financial life. Or even to prepare your taxes again,

again, that's askralphpodcast.com/store. Now, remember I mentioned this the last few days, we're also starting a question of the month. We encourage you to leave us a voicemail with your answer.

So here's the

question of the month. What do you find is the most difficult part of creating and most importantly, living on a budget.

So give us your answers. We need those answers by March 1st. We're going to discuss those answers on the show in March. So

as we conclude today's episode on mastering your finances with a Christian perspective and navigating the IRS audit landscape, remember to apply these insights to secure your financial wellbeing. As I said for more personalized advice, reach out to me, share your thoughts, visit our podcast page.

And as I always say, Stay financially savvy. And until next time, God bless.

you. Abundantly. [00:15:00]