When managing your money, preparing for your taxes, it is important to have a strong, ethical strategy so you pay the required amount owed. There are three red flags that spark attention at the IRS. Knowing these helps you avoid audits.
ONE: Large charitable donations. The IRS is known to scrutinize tax returns with large charitable contributions that stand out compared to the reported income on the return.
The IRS has on record how much taxpayers at various income levels typically donate. Rest assured that as long as you have records to back up your donations, you shouldn’t have any fear if you do hear from the IRS.
TWO: Rental activity
The new tax law limits the deduction for state and local taxes (known as SALT) to $10,000. If this sparks your interest of renting a room out in your house so you can take advantage of other rules that would reduce your tax bill, be aware that the IRS could be on the lookout for abuse.
If you rent out space (whether a whole house or a room) for more than 14 days of the year, you have to report that income to the IRS. But also keep in mind that you get to reduce the taxed amount of that income by reporting a variety of related expenses. Other home expenses (repairs, mortgage interest, property taxes, utilities) are potentially deductible as well on a prorated basis.
Expenses such as subscriptions you pay to online platforms, advertising, and marketing are all business costs that could be counted as a deductible.
THREE: Unreported income
One of the most consistent areas that potentially makes the IRS question your return is a difference between the numbers you reported as income and the information the IRS has. All those forms showing your income ( i.e., your W-2 from work, a 1099-MISC or 1099-K) also go to the IRS. If you fail to report any of those earnings, you’ll hear from the IRS and the discrepancy will generate an automatic letter.
Bonus Info: For the cryptocurrency investors out there, don’t forget you should be reporting your gains (and losses) on bitcoin, etc. The IRS is cracking down on enforcement efforts in that area.
Honest Tax Solutions has years of experience successfully strategizing, planning, preparing, filing taxes for residents and business owners. Avoid red flags, give yourself peace of mind.
Contact the HTS Team today to schedule time to set up a tax preparation and filing schedule for you.