Could your tax return be raising audit alarms?

Ralph
00:00:00

Have you ever filed your taxes, hit that submit button, and then thought, "What if I get audited?" Well, it's a scary thought, isn't it? That uneasy feeling that maybe there's something in your tax return raising alarms with the IRS. But here's the good news. There are steps you can take to avoid those red flags.

Now, Helen wrote in with a great question. "Ralph, how can I make sure I don't raise any red flags on my tax return?" Well, stick around because by the end of today's show, you'll know exactly how to file your taxes confidently, avoid unnecessary stress, and honor God through financial integrity.

Podcast Announcer
00:00:36

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope. Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side.

Welcome to Ask Ralph, the show where real world experience meets biblical truth to break the bondage of financial despair.

Get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep Jr.

Ralph
00:01:16

Well, welcome to the show where we master your finances from a Christian perspective. I'm Ralph, and I am so glad you're here. I'm so happy you chose to spend a little bit of time with me. Now, if you missed yesterday's show, we talked about what to do if you received a tax notice from the IRS. We went over practical steps to handle those letters calmly and responsibly.
So if you missed it, I'm going to encourage you to check it out at askralph.com because you don't want to miss those tips. We've been doing shows all week about taxes. I'm going to encourage you to go back and listen to this whole series.
Well, let's jump right into Helen's full question.
I teased it at the beginning, but let me tell you exactly what she wrote. She said, "Ralph, I'm terrified of being audited. Tax season already stresses me out, and I'm not sure if I'm doing everything right. I've heard there are certain things that can trigger an audit, but I really don't know what they are.
Can you help me understand what the IRS looks for and how can I avoid raising any red flags?"
Well Helen, thank you for being so honest and listen, I know how overwhelming taxes can feel. I meet with people. This time of year, 8, 9, 10 times a day. And I understand that feeling of overwhelming.
I understand that feeling of being worried about audits, but let me assure you this. With the right knowledge and preparation, and like I said earlier in the week with the right person, you can file your taxes responsibly and reduce your audit risk. And let me just remind you, if you've got a question like Helen's, you can always go to justaskralph.com and you can put your question right there and I'll put you on the show. .
Well, as we're talking about encouragement, you know, we're thinking about ways to avoid an audit. Let's look to the good book and find a verse on encouragement. I found this one in the book of Proverbs.
It comes to us from chapter 11, verse 3, and it's actually the first time I've used this on the show. And it says this. "The integrity of the upright guides them, but the unfaithful are destroyed by their duplicity." I'll tell you what, that got a little bit deep for me there. I had to look up, what does duplicity even mean?
But Helen, this verse reminds us that when we act with honesty, and we act with integrity, and you might say, Ralph, what does that have to do with taxes? Well, think about it. If you're acting with honesty, if you're acting with integrity, especially in areas like our taxes, we're doing the right things. We honor God and can live without fear.
So today's episode basically is intending to say that if you're doing things the right way, I'm going to talk about some wrong things that people have done, but I just want to focus on that for a second because I really think it calls us all out to be honest and have integrity when we file our taxes.
And today I'm grateful for this reminder. Because I was thinking about it, I was praying this morning before I started recording and whether it's managing finances, whether it's filing taxes or facing life's bigger challenges, the truth is God calls us to walk in integrity.
He truly does. He wants us to be, if you look at the Bible as a whole, the Bible is full of verses that talk about integrity. And here's the best part. He blesses those who do. So Helen, I really appreciate you reaching out with your question and I'm going to give you some square answers today. And for everyone else listening, that can help you stay out of that audit red flag jungle.
So Helen, let's continue on our tax week journey. Here are some of the major red flags. Number one red flag. Not reporting all your income. Now here's the thing you need to understand. The IRS receives copies of your W-2s.
They get copies of your 1099s and all your other income statements. They're filed by your employer. They're filed by the bank if you have a bank or credit union or investment house, and it's really a pretty simple process. The IRS gets that information. And when they look at your tax return, if your tax return doesn't match the information they have, it raises a red flag.
It kind of goes without saying, that makes sense. So if you fail to report income, even a small amount, that can lead to an audit. Now I talked yesterday about what to do if you get an audit notice. So you have to remember an audit could be something as simple as Helen, you forgot to report the $10 and interest
you got from that credit union. You'd forgot about. But failing to report income, even in small amounts, that's technically an audit. So let me give you a couple examples. I had a client a few years back and he was a freelancer, did work on his own. So he didn't get a traditional W-2 and someone he had done some work for sent him a 1099 NEC.
And I'm going to do a show next week or the week after talking about all the different kinds of 1099s because people don't understand all those ones. But anyway, in this particular case, they got a $5,000 1099. And, you know, from when I talked to them, he said, Hey, Ralph, I totally forgot about it. So I didn't put it on the tax return.
Well, files a tax return. And as I mentioned yesterday, many times it's the following summer or 18 months later, the IRS is comparing the one side to the other. And they noticed that, wait a minute, this was never reported. So the taxpayer got a letter. Hey, you forgot to include this. So in that particular case, we had to go in and fix that return, but this is something you really need to watch out for.
Especially now, if you've heard the news, there's a lot of talk about these 1099 K forms. A lot of people are doing side businesses and they set up with one of these cash apps or Venmo or a credit card processing company. And if you're collecting money through that, the IRS is going to get a report called a 1099 K for any online sales.
So you better make sure you report that information. Talk about another interesting scenario about people who didn't report income. I heard this story from a colleague of mine. I was at a conference a couple of weeks ago. He's telling me about this story. So this particular person, someone was renting out a room for on a vacation rental platform, but he didn't report it.
But here's the problem. That vacation platform does report to the IRS. And in this particular case, this was actually what I'll call the double whammy, interesting. The IRS saw this report from the other company, but bigger than that, the IRS had audited someone who stayed in that vacation rental. And that person had taken a deduction for that rental because they claimed it was a business expense.
And I'm not going to get into that. That's a whole another discussion. But a lot of people don't realize it. Many times an audit is triggered by the IRS looking at someone else's return. And then they look at, you know, Helen, in your example, let's say, this was you. They audit your friend, Sally, who may have rented a room from you or something like that.
Now, Sally puts that on her tax return. All of a sudden the IRS says, wait a minute, we got a problem here. So that's really the first one. That is not reporting all the income. Let's move on to number 2. And that's high income non filers. You got to understand something. High income individuals are a priority for the IRS.
It's not a complicated situation. This isn't rocket scientists we're talking about. Its because typically they owe more tax. So the IRS is wanting to get those people because not filing returns when you have a substantial income, the IRS wants that money. And they also know this. They know they can get bigger penalties and get interest and even legal consequences.
And this is big tax revenue. I don't have the number right in front of me, but you got to understand something. The highest income individuals in this country pay the highest amount of tax. I'll give you a couple examples here. There was a business owner making $300,000 a year and didn't file their taxes.
Assuming now, you know, the IRS will never figure this out. They're self employed. You know, nobody's reporting anything, but here's the thing you got to understand. The IRS has systems in place to track non filers, especially those with high income. Again, that's who they focus in on. It's not just the IRS.
I've seen more audits at the state level because of this as well. There are programs in place to find these people. Here's a great example. Another one. A doctor earning $250,000 skips filing for one year because well, yeah, yeah. We are overwhelmed with paperwork. But again, the IRS figured this out.
Now in this particular case, as I understand, there's another colleague told me about this one. This doctor wasn't very smart. I'm not sure he should be practicing medicine. Anyway, he just totally skipped filing a return for a year, but then next year filed. IRS says, wait a second. This doesn't make any sense.
Where did this doctor go? He fell completely off the radar. So that's the thing. I say this to clients sometimes that they haven't filed for a few years, and I'm going to do a show about that in a week or two also about how do you get caught up? Well, the IRS is going to go back and look and say, wait a second, how come you did, which will lead me to a thing I'm going to talk about here in a minute.
But the IRS is going to go back and say, Hey, wait a minute. Why didn't you file a tax return? So that's the number one thing or number two thing. High income non filers. Which leads me to number 3. High income in general. Again, because the IRS knows that these people have money. The IRS will collect.
So anyone earning, and this is basically what the statistics show. Anyone earning over $200,000, it increases their likelihood of an audit because honestly, their returns are more complex. They've got investment income. They've got complicated deductions. They've got credits. So when you hear about this on the news that rich people get audited, it's true, but rich people started $200,000.
So understand that because there's a large segment of the population that makes over that, especially when you combine incomes. And again, the IRS knows they can get money from that. They're not going to audit somebody in general cases for somebody making $30,000 a year, because what's the IRS going to get. 10 percent of that 300 bucks or 3000 bucks, whatever that looks like, it's not going to happen.
You know, this is the typical example where consultants making $400,000, multiple deductions, they got tax credits, and that's where the IRS is really going to examine them. They might get one of those total compliance audits where they go and look at every single item on your tax return. Again, because you've got situations where maybe you're investing in stocks, you've got capital gains, cryptocurrency, all those things.
The IRS scrutinizes those things and looking to make sure those returns are accurate. Because again, this is where the bread and butter of their tax revenue is coming in. So they're going to focus on high income. So that's number three, high income. Number 4. Aggressive tax strategies. Now, a lot of times you'll hear about these on the TV, on the radio, talking about these situations where, you know, you can file your taxes and pay nothing.
You know, we've got ways to save you a ton of money. The IRS actually publishes what they call the dirty dozen of tax scams. And let me tell you right now, the IRS is aggressive about this because these attract the IRS' attention and he know what to look for. And they look for this thing called tax evasion,
or tax avoidance, or if there's no legitimate business or economic purpose. And just remember this. Tax avoidance, that's legal. You can do that. You can avoid taxes as long as you can prove it. But tax evasion, that's criminal. That's when the guys, the IRS guys with the guns and gold badges come out and they take you away.
You don't want that. Give you a couple examples. Talk about a business owner created a shell company or the shell company, because he wanted to deduct expenses like his luxury car, a vacation home. Set up a separate business. And then, you know, his some accountant or some fool that was spewing information on TikTok or one of these other social media platforms said, Hey, here's a great way to get your car written off and your vacations.
Then the IRS' going to look at that and say, wait a second. This business doesn't make any sense. It doesn't have any income. There's also a big area here for investors because there's these people promoting these tax shelters. Oh, you don't have to pay capital gains taxes. You can shelter that. But here's the thing you need to understand.
The IRS is looking at these things because again, a couple of reasons. Number one, it's on their dirty dozen thing. Number two, we're talking about high income individuals. So they know there's gold in that water. They can find gold. They can find tax dollars. So that's number four, aggressive tax strategies, which leads me to number five. Kind of goes hand in hand with this.
And that's excessive deductions. What are the things the IRS does? And I stress this with clients every day. The IRS looks at statistics, they compare tax returns. They've got to listen, think about this. They got a ton of data. They could crunch all that number. And if they see that your claim of deductions that are unusually high compared to your income, that's going to raise a red flag.
So we're talking about today, red flags, right? And see, that's where the IRS is going to do that audit. They're going to ensure the deductions are legitimate. I'm going to make sure they're properly documented. One of the things I see in this area, a lot of people need to be careful of, especially small business owners. Meals and entertainment.
And they've got this income, is a decent income. Then they got 20 percent of their incomes going to meals and entertainment. You got to really watch out for that. Cause I was going to say, wait a second, that seems a little bit out of line. And one of the things I say to my clients, you'll probably laugh when you hear this, Helen, I'm sure you'll appreciate this.
I would say to my clients, look, here's the test. If you can prove it to your grandmother, then I think it's legitimate. Cause I hear the way I grew up, you don't lie to grandma. Grandma would take the switch to you if you're not paying attention. So if you can passed a grandma test, then it's probably okay.
Let me give you a couple of examples. Let's say we got a taxpayer that's earned $70,000 a year. Very middle income person. And they write off $25,000 in charitable contributions. Wait a minute. How in the world did they afford to do that? Now there are legitimate reasons they could do that. Maybe they inherited money, you know, maybe they got some gift from somebody.
But all of a sudden they take 40 percent or 35%, whatever it works out to be in charitable contributions. It's going to raise a red flag with the IRS. Same thing with the business owner. IRS sees they're deducting a hundred percent of their car expenses. And one of the questions on the tax return is, do you have another car available for personal use?
Uh, no. Well, then the IRS is going to start thinking, wait a minute. You're telling me that the only time you use this car is for business. It doesn't pass the sniff test. Grandmom wouldn't approve. So that's number five, excessive deductions. Let's talk about number six. Home office deductions. This is one the IRS is really strict about because, it got a kind of crazy with COVID. There are strict guidelines to claim a home office deduction.
Let me tell you about the two part test. A lot of people don't understand this. It's got to be used, and listen to me carefully, exclusively and regularly for business purposes. Two tests, two things. Give you an example. Remote worker, working from home. Now everybody's working from home. We're starting to see that coming back around where people are actually going to their offices again. We've got a remote worker, claims a home office deduction for their entire living room. The argument is, well, that's where I have my computer set up. That's where I do my Zoom meetings because I got big TV in there and I can see everybody. But here's the problem. Is it used exclusively for business?
Is there a couch in that room? Give me an example of this. I had a client got audited. Now they came to me after they were audited and they had already started getting back to the IRS and they sent the, it's a funny story, right? So the IRS audits them and they say, we see that you took a home office deduction.
And you're claiming, I think it worked out to be like 30 percent of their house, which to me made no sense. Anyway, they get on it. The IRS says we want you to prove this. So the client says, oh, I can do that. I'll take a picture of the room and I'll send it to the IRS. They'll see my desk, see my computer, they'll see all that stuff.
So they took a couple of pictures, sent them to the IRS. And the IRS says no, we're going to disallow this. And the taxpayer couldn't understand. They came in to see me. I said, let me see the pictures. I look at the pictures. There's a bed in the room. There's a corner with kids toys in the room. Obviously didn't pass the exclusive and regular test.
So think about that exclusive and regular. That's the big test and the IRS will catch you on these. Another example of this. Taxpayer deducts utilities and internet expenses for their home office but they don't have any receipts for that. They don't have any record of calculations. Are you telling me that the only reason you have internet in your home or the only reason you have power, think about that one for a second, You're going to make an argument to the IRS as well.
You know, I only have electricity in my house because I have a business or a home office. Again, grandma would not approve. So that's number six, home office deductions. Let's look at number 7. And we kind of alluded to this a little while ago, and that's charitable contribution. This is an area where the IRS is really focused in their audit efforts.
And I got to be honest, a lot of people aren't impacted by this right now because the standard deduction was raised so high during Trump's first administration. I'm hoping we see that continue. So it didn't affect as many people because there's not many people itemized. Now look, the IRS allows you to deduct charitable contributions.
That's one of the things that's part of the IRS code. But you gotta be really careful about the truth in that, you know, don't inflate the values. Don't have things that are unsubstantiated. You need proper documentation. Those are receipts, appraisals. For example, I'll tell you a funny story. So this has probably been 25 years ago.
I had a client and she was a pastor of a church and the church was meeting at some recreation hall or something like that for the longest time. And she said to me one day, she goes, Ralph, you know what? I've got this ranch house. All I need is a place to crash. I need like a twin bed and a little kitchenette.
She goes, can I donate my house to the church and make that the church, you know, the church location. I said, certainly that's reasonable. And you can call your bedroom a parsonage, the kind of scam going on there. So anything like that. So I said, but here's what I want you to do. I want you to go have the house appraised, and then we're going to do the paperwork to actually have the deed transferred over to the nonprofit, which was the church.
She did that. As I recall, the house is worth, let's say $150,000. File her tax return. And we show her income, which was minor. Cause she was only getting a love offering for the church. That's like $25,000 a year. And we've got this $150,000 deduction. Now there are limitations to how much you can take in a particular year.
So we're only able to take a little bit, but of course I figured this was going to happen. And I told her, I said, be prepared, have your ducks in a row, have the appraisal ready, have the deed transfer, all this stuff, right? Of course she gets an IRS notice. And the IRS says, wait a minute, this doesn't make any sense.
How do you donate five times or six times your income? How do you justify that? Well, guess what? We won because we showed the appraisal. We showed the title transfer. We showed the room that was a parsonage, but you got to be really careful with this. A lot of people will take deductions for, I had a client many years ago.
And every year they would bring in their non cash charitable contributions. And they were tens of thousands of dollars. 10, 11, $12,000. And I would say to them, where are you getting all this stuff to donate? And this particular situation is really interesting because this particular taxpayer worked in retail.
And what he would do is at the end of each season, the retail shop would say, Hey, we're going to donate all this stuff to charity. So this particular taxpayer would go to the charitable place, get the receipt from the charity and then put it on his own tax return. I said, Whoa, wait a second. I said, that's not your stuff to donate.
He goes, well, they gave it to me and they said, I can go donate it. I said, okay, fair, fine. You're not doing anything "ethically" wrong. But your value in that is zero. You didn't pay anything for those things. So you're not entitled to that charitable contribution. Well, I ended up losing a client over it because he couldn't believe I wouldn't do that anymore.
Now, the IRS has since corrected that. And here's a little truth bomb a lot of people don't know about. If you donate non cash donations. Those are things like clothing, furniture, household appliances, whatever those things are, and that number is greater than $5,000 in a calendar year. Guess what? You're going to have to get those items appraise and you're thinking, Ralph, what do you mean? Let me give you an example. So let's say it's February. You've got this nice sectional couch you don't use anymore. And you call the local 501 C3 charitable organization. Can you come take this couch? Sure. And you say, and they say to you, what's the couch worth?
Oh, it's worth a thousand dollars. Fantastic. They write your receipt, put it in your tax file and move on. Along comes April. End of school time, getting ready. You clean out your kid's closets, and they've got all this leftover clothes. And you take them to the local Goodwill or Salvation Army and they say to you, what's this worth?
And you followed my advice and you wrote down what everything is worth. And let's just say it's another thousand dollars. So now we're up to $2,000 for the year. Let me get to June. On June, you decide you're going to move. You're going to buy a bigger house. You're going to take a step out and buy a bigger place.
Your family's growing, all that sort of thing. And you've got, you know, this piece of furniture you don't need anymore. And you've got this piece of furniture and you've got an old mower and you've got this and that. You find an organization that come pick this stuff up. Again, they give you that receipt.
How much is this stuff worth? Ah, you know, it's really worth about 3,500. Okay, great. You get the receipt, you put it in your tax file. So now we're at a thousand 3,500. So now we're at 5,500. And then the end of the year comes and you got my email about, Hey, make those year end charitable contributions.
And you do another whole home clean out because you've moved into your new house and you found stuff that you thought you were going to keep, but it's just doesn't fit anymore. So again, you get the charity on the phone. They come out with a big van, they pack up everything. And you say, what are you doing?
Oh, it's $2,000. So now all of a sudden you're at $7,500. Well, guess what? Now all of a sudden the IRS says you got to have an appraisal for every single one of those items that was donated. You say to me, Ralph, dude, how do I get an appraisal for something I did in February? How do I get an appraisal for those kids clothes?
Yeah, you just found the trap. So you got to be strategic about that. You know, you can go up to $5,000. And again, this assumes you can itemize, but be strategic about that. If you're going to do that type of thing, make sure you're getting those things appraised. And you have to use an IRS authorized appraiser.
So that's the big thing with that. So let's move on. So that's number 7, charitable contributions. Cash transactions. This is another one. I'm going to tell you a funny story about this one in a second. You ain't going to believe this one. The IRS is focused on cash. Why? Because it's the black market
if you think about it. You know, there's no way to trace it per se, right? They trace credit card transactions because like I talked about earlier, the vendor is sending out that 1099K. If they're paying you with a check, they're sending you a 1099 NEC, or if you're paying rent like I said, I'm gonna do a show about those, but they know. For example, restaurants, restaurants take a lot of cash and see the IRS wants to ensure that all the income is reported.
And like I said, cash transactions are harder to track. So think about this. Restaurant owner reports $50,000 in income, but usually gets large cash payments. The IRS looks at that and says, Oh, wait a minute. Which leads in my example. So let me tell you this example. There's a pizza shop at the beach here.
Not too far from me. Great pizza. I understand, I never actually ate there, but they said it was a good pizza. So they're doing their day to day operations. They get to the end of year. They filed their tax return. They went and met with their taxpayer. I was, that was not me. And they're sitting down with the preparer and said, you know, the preparer says, okay, what is your income expenses?
And Luigi, we'll call him the pizza man says, well, you know, I got this 1099 K from our credit card vendor. So it says we collected a $175,000 in sales. So that's what I want you to put on the tax return. And a tax officer says, okay, you know, you can collect in cash. No, you know, I just collect this 175.
Fair enough. Files a tax return. Now, in this particular case, the IRS didn't say anything, but the state did. States looks at this return and the state has some statistics and they say, okay, let's compare some, let's look at the tax return. Here's the revenue they reported. And they look over at that 1099 K and they say, well, isn't that interesting?
$175,000. Well, that's exactly what they paid in credit cards. So you're saying, so this was the auditor talking. So I'm thinking in my own head. The IRS or the, excuse me, the state auditor is thinking they don't ever collect cash. So this was a great story, right? So this, the state auditor decides they're going to make a road trip.
They were hungry. It's lunchtime. They go out to the pizza shop. They order a pizza. They're standing at the counter. They hand the person a $20 bill when they pay their, for their pizza. Next thing you know, they said, okay. So they asked the person who was working. He said, you know, cash is kind of interesting thing.
You know, I've have to report all that stuff. Guys like, well, I don't know about all that. I just work here. Well, I guess Luigi in the back hears that and he comes walking out and he goes, yeah. He says, you know, cash is king. We really like it when customers pay cash. Oops. A couple of days go by, Luigi gets the letter from the state division of revenue.
You are being audited. See, here's the thing. The state has statistics. They know for restaurants, for example. Now, truth is a lot of people pay with credit cards, but the states now know, and the IRS knows a certain percentage is going to come from cash so if you're only reporting what's on that 1099 K, you're going to get audited and you're going to lose.
So that's the thing when you see these cash only place and the IRS isn't dumb. Like we're not dealing with dumb people to IRS. They know what to do. So that's number eight, cash transactions. Number 9, foreign accounts. I'm not going to spend a lot of time talking about this, but there is a whole area of tax code where you've got to report foreign bank accounts and income.
If you fail to disclose these things, they can result in severe penalties. Now, a lot of people say, Ralph, what that doesn't affect most people. And that's true. But think about this. What happens if you have a relative that's a foreign relative and you inherit something from them and you just keep that account because it was easier.
You don't want to take a trip to Ireland, for example, to go to close that account. Well, guess what? Technically, you've got a foreign bank account and that needs to be reported. It's reported on what's called a foreign bank account report or FBAR. And the IRS looks at that. They get data from these other countries.
They share information. So make sure report it. So that's number 9, foreign accounts. Number 10. And I want to spend a few minutes here, because this is one that when I tell you this story about the Corvette, you can be like, I can't believe it Ralph. The IRS and the States look at a very simple thing.
They look at your income that you report on your tax return. And then look at your lifestyle. Like in the state of Delaware, for example, there was a crackerjack auditor here. And what he was doing or she actually knows that he or she, but it doesn't really matter for our story. He was pulling property transfer records, seeing what houses were being sold, what houses were being bought.
And then he was comparing that to the tax return. So he would find somebody that just bought a $400,000 house and go pull their tax return and go, well, if they bought a $400,000 house, they're going to have a certain amount of income to qualify for a mortgage, to get the down payment, all that sort of thing.
Well, what he noticed was he had these taxpayers that had a $400,000 house and we're showing $30,000 of income on their tax return. And he said, something don't add up here. So he started doing these audits and let me tell you, it was really fruitful. Now I came across one because I had a client that was a, that was involved in that situation.
Now my client was a little bit different scenario. My particular client was fine because they had that scenario where they were only showing $30,000 in income. And they bought the $400,000 house. Why? Because their parents moved in with them and the parents actually paid cash for the house. And they all lived together as the parents got older.
So they would have somebody to convalesce with. But the idea there is the IRS or the state can compare your lifestyle. So let me tell you this funny story. So I had a client one time, he was a painter and he was getting audited by the IRS. He hadn't filed whatever that looks like. And then we finally did his returns and this dude didn't want to show any income on his tax returns at all.
We filed the tax returns and he's shown like $30,000 in income on his tax returns. IRS says, okay, we're going to audit this guy. Mostly he got audited, not because of the lifestyle choice, but I'm going to explain why that's relevant in a second. He got audited because of the fact that he hadn't filed. So they do what's called an in person audit.
He was actually working for another accounting firm at the time. We had to bring the client in. We had to bring the IRS agent in. Well, unbeknownst to us, the client had just gone out and bought this brand new red flashy Corvette. And as luck would have it, both him and the auditor arrive in our parking lot at the same time.
Well, you can only imagine what happened. Client gets out of his car, this shiny, brand new, beautiful red Corvette. I mean, this car was sweet. IRS agents getting out at the same time, pulled up in their government Ford or whatever they were driving. IRS order gets out of the car and starts to walk to the back of his car to collect his briefcase.
And my clients walk him by him and the IRS goes, man, that is a sweet car. That is really sharp. And my client goes, yeah, he says, you know, I just paid cash for this thing. You know, we had a really good year last year. We got a problem here. So long story short, IRS comes in, IRS agent comes in, client comes in, they sit down at the conference room table.
And the IRS agent says, I'm assuming we can cut to the chase here, right? Because obviously there's a problem. And the other account that was working on hadn't, didn't know about this interaction at the time. And he goes, I don't understand. And the high risk auditor was very candid, said, look, your client just showed me the brand new Corvette that they just paid $70,000 cash for.
And you're telling me they only earned $30,000 last year. Something don't add up here. Well, obviously that was a big deal. So that's number 10, discrepancies between income and lifestyle. Number 11, errors and inconsistencies. Now listen, simple mistakes, math errors. We don't see a lot of math errors that got talked about yesterday because a lot of people are using tax software, but we do have situations where you miss information.
We talked about Helen, you maybe forgot to record that 1099 interest. Well, that can trigger an audit. And here's the problem. So I say to clients all the time, it's those little things that trigger big things because now all of a sudden, the IRS, it pops out of their system. They go, Whoa, wait a minute, let me take a look at this.
And then maybe it hits a human because a lot of these things are machine based, a computer saying, well, you missed, you know, it's comparing apples and oranges. Well, the two things don't match well, ding, ding, ding bell goes off, goes in front of a person. And then the person does a little bit digger deep.
And so that's a little deeper dig. Yeah. I got to talked about on yesterday's show. We had a client that made a mistake and was supposed to put $2,000 in for a charitable contribution, but $20,000. Honest mistake. He really did in not intend to do that. Well, the IRS gets the return. They look at, they say, wait a second.
This person's $20,000 donation is half of their income. We've got a problem here. And then the problem with that is in the IRS, we'll dig in deeper. So that's a big thing to watch out for. Big red flag. Errors and inconsistencies. Number 12, amended returns. Now there are times when it makes sense to file return.
It's something has happened. There's been a mistake on your return. But if you file a tax return and it reduces your liability dramatically and you haven't documented that well, that's a big red flag. I'll tell you an example of this. I see this a lot with people looking for a mortgage. They'll file a tax return with inflated income because the mortgage company wants to see a copy of those tax returns.
And maybe they needed to have a certain amount of income in order to qualify for that mortgage. This is a big problem. I see this a lot. So they file this tax return. They add an extra 20, 30, call it whatever, $40,000 worth of self employment income. And yeah, they get nailed on their taxes, but they're never going to pay that tax because they're filing the tax return with the intention of getting at the process.
The mortgage underwriter sees the tax return. Oh, fantastic. You qualify for the deal. And then as soon as the mortgage closes, they go to settlement, they file an amended return. Oh, we made a mistake. We carried a number wrong. The income's too high. Well, guess what, my friends, that's going to trigger an IRS audit 9 times out of 10, because they're going to say, wait a second, how did you make such a big error?
So you better be able to figure out a way to prove that. So that's number 12, amended returns. And last but not least, lucky number 13, and that's large changes in income. People don't believe me on this. One of the main things I look at when I do a tax return is I like to compare years. So if you're a returning client to me, I'm always looking at what did last year look like?
Because I know for a fact, the IRS is going to look at those changes and go, wait a minute, how does this happen? Like, as an example, let's say we have a client that has $200,000 in income in year one. And then in year two, they only have $40,000 in income. The IRS is going to say, what happened? Now there may be a legitimate reason for that, but again, the computer system at the IRS their, whatever you want to call it, their network is going to say, ding, ding, ding, ding.
Here's a potential audit. So I see a lot of this with self employed people. Again, because they want to boost their income. Maybe because they're trying to get a line of credit with a bank, or maybe trying to buy a new vehicle, buy equipment. You got to be really careful about that. So if you've got a large change in your income, just be prepared.
There's no, there are reasons for it. For example, Maybe you have a disability all of a sudden, maybe you had to go out of work because you had some kind of surgery or something like that, which would explain it. You just better be prepared that they may get, you may get that IRS notice to explain it. Now I've got, I've covered a lot of stuff here, but Helen, these are the red flags that I see most trigger audits.
And again, an audit can be something as simple. And I'll get to talk and talk about that in a second, simple as a notice or an in person thing. But let's talk about the impact these audits have, because there are really two pieces of this puzzle in my view. There's a financial impact. Because if you get audited, maybe you're going to end up paying taxes.
You're going to end up paying back more taxes. You're going to pay penalties because maybe it didn't do the right thing. Maybe there was an error made. You're going to pay interest because you know, they wanted that tax due on April 15th. And then of course the financial cost of hiring somebody like me, a professional to go fix it.
So there's that financial impact and that, that doesn't want, I don't want to undersell that. That's a big deal. But the other thing, and people don't consider this. There is a huge emotional impact to be in audit. Why? Because they're time consuming. There's anxiety. Maybe you're sending correspondence back and forth with the IRS.
You're meeting with me, you're meeting with a tax attorney, something like that. There's this correspondence going back and forth. It takes you away from your work. If you're self employed, it takes you away from that. If you got a W2 job, it takes you away from your work. Again, it's anxiety. The thing I want to say though, you got to remember this.
A lot of people take it personally. Audits are procedural. They're not personal attacks. There's nobody sitting at the IRS going, I want to go find Helen and I'm going to take her to the cleaners. Now, maybe you're a criminal. I'm not saying you are Helen, but there are people out there that are tax evaders.
There are people out there doing things with nefarious intent, but for the most part, that's not the case. For the most part, these are just procedural things. Two things don't match up. So let's talk about the different types of audits.
There are really three types of audits.
There's a correspondence audit. We talked a little bit about that today. That's where the IRS is going to request clarification or documentation. They're going to send you a letter and said, Hey, Helen, we [00:37:00] see that you did this. You forgot to report this. Can you take care of that? Talked about that yesterday on the show when I said, you know, you get those dreaded IRS notices.
These are usually the simplest type of audit. Yes, I made a mistake. I forgot to report that or no, here's the documentation to prove it. So that's a correspondence audit. Second thing is what we call an office audit. You think about this in terms of severity, we're going, we've kicked it up a notch. This is where the IRS actually wants to meet with you in person.
They want you to bring in your documents. They want you to bring in your canceled checks. They want you to bring in your receipts, all those types of things. That one's gotten a little bit more serious. You know, they're not just asking for stuff in the mail. They want to see you face to face. If you've got a business, maybe they want to come to your place of business.
That's in the revenue procedure manual. They want to go see your business, which leads me to number three. And that's the field audit. Field audit. And that's where you get the knock at the door. Hi, I'm Mr. Jones from the IRS. And I'd like to talk to you about your taxes. IRS agent visits your house. They visit your business.
These are not pleasant experiences. Now I got to be honest with you, that is very small percentage. And they're there for the complex cases. They're for large document reviews. And generally speaking, it's not going to happen like somebody just from the IRS knocks at your door. Usually you've got notices, you ignored them.
You've gotten letters, you've ignored them. I talked about that whole series of collection notice suggestion. So those are really the three main types of audits. That's the correspondence audit, the office audit, and the field audit. Well now let's get to the meat and potatoes of what Helen really asked and that's how do you avoid those audits?
Because the key to this whole thing is we want to try to avoid the audits.
I'm going to give you a quick rundown of the things I'm going to tell you. You should do tips to avoid. Number one, report all your income. Very simple. Be sure to be honest and accurate with all your income sources. Number two. Keep accurate records. If you listen to me, I talk about this all the time.
Maintain organized records for your income, for your expenses and your deductions. That way, if you get audited, you go to the file, you pull it out and you send it to the IRS. Number three thing, this will help you prevent getting audited. Use accounting software. If you have a small business, automate that, improve it because it's going to give you better accuracy.
Number four thing, file electronically. Yes, you heard me right. File electronically because you don't want to have those math errors. One of those dumb mistakes. And the cool thing about electronic filing is there's some built in audit tests to that. They check the, make sure everything is correct.
So number four, file electronically. Number five, a lot of people don't want to hear this one. File on time. I've heard people say, Oh, I file late because less people who file late or get audited. That's not true. File on time. For two reasons. Number one, you're actually less likely to get audited and number two, you're not gonna pay penalty and interest if you owe money for filing late. Number six, double check your return. Talk about this yesterday when I talk about notices. Take a look at it. Read it like a book. Make sure it all makes sense like that client that over put their charitable contributions. They should have seen that if they had gone back and looked at their return. They would have said and it would have do like I do compare two years and say wait a minute like last year our charitable contributions were $4,000.
Now they're $24,000. What happened? So double check your return. Number seven, provide clear explanations. A lot of people fight me on this. Even people, even colleagues. If you've got an interesting tax situation, even if you're electronically fine, I am a believer in sending that documentation. You can attach it to the tax return because if you can avoid that letter to front end, if you can avoid that audit, if you can avoid that correspondence audit.
Just provide an explanation. Use our example from earlier. You went from making $200,000 to $40,000. Maybe include a narrative that says, you know, I had a heart attack and I was out of work for, I'm going to be out of work for two years or something like that. And last but not least, number eight on my list here.
Sometimes you just have to seek professional help. Because here's the truth. And I really do believe this. Tax professionals, generally, the returns they prepared aren't audited, but over and above that seat, when you meet with somebody like me, I can tell you about those audit red flags as we're doing your return to prevent you from making those mistakes in the first place.
I'll show you how to be transparent. I'll help you keep you out of that audit trap. So those are really the big number 10 tips to avoid. Number one, report all your income. Number two, keep accurate records. Number three, use accounting software. Number four, file electronically. Number five, file on time.
Number six, double check your return. Number seven, provide clear explanations. And number eight, seek professional help. I promise I got a couple more things to cover. It's going to be a little bit long show, but there's a lot to cover here with these red flags, because think about like this. I said this the other day. There's two certainties in life, death and taxes.
Well, if we can avoid the audit in the first place, we should try to do that.
So now you've found yourself in this position where you've gotten audited. You've gotten that letter. I encourage you to go listen to my show from yesterday, what to do when you get a letter.
But there are resources out there if you're facing an audit. You can go to the IRS website. They got a ton of information on there. The IRS procedure manual, your bill of rights, the taxpayer bill of rights. There's a ton of information out there. So start there. Number two, there's also this thing called the taxpayer's advocate service.
I've done shows on that before, but they're an independent organization within the IRS that can help you. Now they're only going to help you if you've worked through the normal IRS channels already. If you've not done that, they're going to ask you to start there, but that's an option. Of course, like I said in the last section, tax professionals, there are CPAs, public accountants, enrolled agents, attorneys that can guide and represent you.
We talked about that yesterday. You know, I started this week off with a discussion of, have you got to the point where you need to bring a pro in to help you with your taxes? So consider that. And then of course, if you're in the low income area, there are some low income taxpayer clinics that are free or low costs for qualifying individuals.
And while I'm bringing this up, every day, I write a blog post. In the blog post, it goes a little deeper. So I would encourage you to check out today's blog post. You get to it by going to askralphpodcast.com/blog, because in that I go a little deeper. I've got references. I got resources in there.
I know we've covered a lot. So let's take a few minutes and just reflect on what we've covered today.
We'll do our reflection questions.
So let me ask you a few questions. Number one question. And Helen, I think this hits close to home. Are you confident that all your income is accurately reported on your tax return?
Before you sign that return, before you hit that submit button, right? So I started this show with that. You know, do you feel uneasy when you hit that submit button? Make sure that you're confident that all your income is accurately reported on your tax return. That's thing number one. It's just a big red flag.
Number two, are your deductions backed by proper documentation? When you file a tax return, the IRS says you're supposed to have that documentation ready so that if the IRS knocked at the door tomorrow, you'll be able to show them the information, your receipts, the documentation for that. So I asked you to ask yourself that question.
Are your deductions backed by proper documentation? And the third reflection question. How can you use this tax season today, where we're at right now, we're in the middle of tax season, as an opportunity to honor God with integrity? Because that's what this show is all about. How to maintain integrity.
Listen, I want you to pay the least amount of tax that you can legally pay. It's what I do, what I do. And I'm not embarrassed to say it. That's my goal. If you come and meet with me and I'll talk about that in a second, how you can do that. My goal is to help you pay as little tax as possible. Supreme court had a decision many years ago that said tax avoidance is legal.
It's actually encouraged. Now tax evasion, that's criminal. And they put you in jail for that. So ask yourself that reflection question. How can you use this tax season as an opportunity to honor God with integrity?
Well, let me ask you a question. Have you ever felt that sinking feeling when you're about to do your own taxes?
Like Helen, today, are you worried about being audited? You're just worried about, you know, do I, am I gonna get this letter from the IRS? I don't know what to do. Because here's the thing. An IRS audit isn't just a piece of paper. We talked about this. Financial's emotional, it's stress, it's uncertainty.
It's sleepless nights. You get to the point where you start questioning yourself. Did I miss something? Will I owe more than I can afford? What do I do next? I just don't know what to do. It's overwhelming. And honestly, it can feel like you're completely on your own. But here's the thing you need to understand.
You don't have to face this alone. So I've got 30 years of experience. I've helped people just like you, not only survive audits, but avoid them altogether, and that's really the key. Because see, here's the thing. I know how confusing tax laws can be, and it's easy to make an honest mistake. Most of the times when I deal with clients that get a letter, it's because they made an honest mistake.
They didn't understand something. Well, that's why I'm here. I'm here to guide you. I'm here to protect you. And I'm here to ensure your return is filed responsibly. And like I said, while maximizing your financial potential. So I'm gonna encourage you today. If you, if what I've said today has reached you, go to askralph.com and book a call with me. It doesn't matter if you're a small business owner, struggling, juggling endless responsibilities. Maybe you're a professional navigating complex deduction. One of those high income people, or maybe you're just somebody that's anxious about filing. I got you covered on that because I'll handle your situation with care.
I'll handle it with expertise. And most of all, I'm going to handle it with respect because I know how much this matters to you. This is what I do on a daily basis. And as I mentioned earlier, I would encourage you, go check out our blog post every day. It's at askralphpodcast.com/blog. Like I said, I go deeper there.
I give you some resources. I give you some references. I don't just make this stuff up. I put the information in there so you can go check it out. One more thing I want to mention. We launched this about a week ago. If this shows brought you value, if you've learned something from it, I'm going to ask you to do something for me.
I want you to consider supporting it at askralphpodcast.com/support. We have a thing out there called buy me a coffee. Now I don't even drink coffee. Nobody's going to drive up to my office and deliver me a coffee. It's a way to give back to the show virtually. It's called buy a coffee because your support helps me continue to bring this guidance and bring these resources and peace of mind to people one episode at a time because guess what?
It takes a lot to do this. You know, we release a daily show. We put it on Audio podcasts, put it on video podcasts, all that sort of thing, So if you feel like your heart's leading you to that, just go to askralphpodcast.com/support. You can make a one time support. You can do a monthly support.
I would really appreciate it. So as we close today, we tackled Helen's question. Helen, I hope we answered your question about avoiding IRS audit triggers. We talked about common red flags. I shared some specific steps to avoid them and reminded you that the importance of integrity in your finances.
Now, tomorrow we're going to change this subject altogether. We're getting away from taxes for a day or two. Tomorrow, we're going to talk about 10 smart steps to maximize your retirement savings in 2025. And I don't care if you're 20 years old or 70 years old, I'm going to provide you a 10 smart steps that you can take this year to maximize your retirement.
Remember this as I close, my passion is to help you achieve financial success. I want to see you live out your dreams. And I want to see you grow in your faith. And I know together, we can master your finances from that Christian perspective. So as I always end the show, stay financially savvy out there and may God bless you abundantly.

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