Most professional tax preparers use computer tax software to prepare tax returns. Some of these software packages are good, others not so much. Most of the good programs will help red flag deduction that might prompt an IRS audit on a client income tax return. Even so, there is no replacement for experience and common sense. Most audit red flags do not require a rocket scientist to know, that the IRS might question these expenses. Business & Financial Solutions uses a combination of excellent software and the best tax prepares for checks and balances to your tax returns.
It should be noted that just because there are certain tax line items that are red flag line items, it does not necessarily mean that they are not valid tax deductions. Business & Financial Solutions will attempt to point out a few audit flags, where deductions are commonly abused. Again, we are not saying that if a taxpayer has legitimate expenses in these target areas that he/she should not claim them. However, you should be prepared for the IRS to ask you to prove them. There is a strong likelihood that these might raise questions or concerns with the IRS.
Home Office Deductions
Again, this may be a legitimate expense, but it is often abused. Many taxpayers claim a much higher percentage of the home, than is actually used for the purpose of business. In turn, the taxpayer is also entitled to claim the same percentage of utilities, mortgage interest, and real estate taxes and may other expenses associated with the upkeep of the home.
Many charities provide taxpayers with an open-ended receipt for material donations. For example, when you donate clothes to your favorite charity, the give you a receipt and allow you to complete the amount based on the value. The charity does not know what you paid for the clothes. They rely on the honor system, and your honesty in reporting the value, and the basis for the value. The IRS has determined that many people are not so trustworthy. How can you blame them when, a person making $30k per year, is claiming $20k in charitable clothing donations? The numbers just don’t add up. This is just common sense and you don’t need tax software to tell you that.
Unreimbursed Business Expenses
There are a couple of common violations to this deduction line item. First, there are the expenses claimed that are not legitimate write-offs, such as a suit as a uniform. The IRS has strict guidelines about what is considered a uniform. If you are uncertain, please feel free to contact Business & Financial Solutions, and we can schedule a consultation. Our firm will be happy to help you. Secondly, there is the amount claimed for what might even be a legitimate expense. Though you may be eligible for the expense, this is not a license to exaggerate the expense,
The use of digital currencies, such as bitcoin, has grown tremendously, to the tune of over $3k transactions per hour, with a market value of over $12.6 billion. Although, the IRS has yet to issue specific guidance addressing the tax treatment or reporting requirements applicable to digital currency transactions, it is a red flag. One might suspect that the IRS is keeping a watchful eye on industries involved in digital currency.
Not Reporting Taxable Income
This seems like it would be a no brainer, but not so, apparently. You must report all 1099s and W-2s, even if you believe them to be incorrect. You can argue the accuracy later. Just for the record, you should also include all income, where you have not received a W2 or 1099. That is the requirement of the IRS. Many taxpayers develop problems with the IRS at the most inopportune time, because of under reporting.
Day-trading losses on Schedule C
The federal government respects long-term growth of business. Day trading violates that concept. Day trading may also be the playground for inside trading. An audit in this area may not only prompt an audit, but an audit may also take a taxpayer down a road of criminal action. The country is built on the design of commerce. Such short-term investments, promotes an unstable market and a threat to commerce and trade.
Rental Property Losses
Rental losses are a reality for rental property owners. Consistent losses and excessive losses year after year become questionable. Real estate professionals don’t go into business to take losses. The IRS becomes concerned over real estate owners that are constantly claiming real estate losses on Schedule E, and never show promise of making a profit.
These are just a few areas that will draw attention to your tax return from the IRS. If you are concerned about some of them, and you are not sure about claiming these deductions, we are happy to answer your questions. If these are deductions claimed in recent income tax returns, and you think they should be reviewed, we can help Call Business & Financial Solutions and speak with a tax expert today at (855) 557-2222. You can also email us at firstname.lastname@example.org.
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