Around this time of the year, all of us start to wonder if this is the year the Internal Revenue Service will come to audit. Most of us don't have to worry, really, because we are honest and report our incomes accurately and claim only the deductions and tax breaks we deserve.
But there are a few who insist on pushing the envelope -- or just blunder -- and win themselves a communication from the IRS. Some of these mistakes are very common, yet can be very costly.
The IRS even has a list of frivolous tax arguments. Here some of the sure-fire triggers that will almost certainly get you certified mail communications or a knock on the door from a member of the IRS.
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You hide income offshore.
Hiding income offshore has often been a problem for the affluent. The operative word is "hide," as in not reporting that the money parked offshore is either generating income or is income. If the IRS finds out about it, they will respond. Just ask H. Ty Warner, the creator of Beanie Baby plush toys. He hid more than $100 million in Swiss bank accounts. He pleaded guilty in late 2013 to not reporting $3.2 million in income in 2002. In all, the IRS said, he failed to report more than $24.4 million in gross income between 1999 and 2007. He was lucky. He earned probation rather than jail time.
You're a tax protester.
Being a tax protester means you try to argue that the U.S. tax code is unconstitutional. Or that you don't have to pay taxes for any reason. Or that you will not pay your taxes because you object to government policies. The courts have routinely knocked down these arguments. Actor Wesley Snipes tried to claim he did not owe millions in income taxes. He went to federal prison.
You claim big home-based business deductions.
It is fine to run a business from your home, and normal deductions come along with that. But the interest of the IRS will jump if you report sizable losses from your business on a consistent basis. The IRS will wonder if you are really running the venture to generate tax deductions -- and hide taxable income. (The correct answer is to earn a profit.) Most abusers use the home-based business to hide living expenses or personal travel costs. Michael Craig Cooper of Topeka, Kan., earned a 20-year jail sentence for marketing a phony tax relief system built around home-based business deductions.
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You claim large unreimbursed business expenses.
Having large unreimbursed business expenses means that you claimed huge amounts of driving expense for your job that your employer did not reimburse you for or that you claimed as a business expense. Or you claimed clothing expenses that are not allowed. Or you tried to write off meals, entertainment and other items that do not qualify. If you hear a tax preparer claim he can boost your tax refund substantially this way, find someone new to do your taxes. Always remember: You can deduct only the excess above 2% of your adjusted gross income.
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You claim large itemized deductions.
Large itemized deductions can cause scrutiny, such as a contribution to a charity, religious organization, school or college. Or big mortgage interest deduction. The IRS may ask for documentation. Make sure you have it. The auto donation deduction can trap a lot of people. There are many "fat chance" deductions that create flags. The deduction is limited to what the charity realizes if it sells the vehicle. If the charity keeps the vehicle, however, you can deduct the fair market value, but you'll need to substantiate it.
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Be advised that this only scratches the surface on how to easily get an IRS audit. There are many other ways to win the scrutiny of the IRS, some of which include the following:
- You omit income from your return. If there's a W-4 statement or a Form 1099 on file, the IRS can match it up to you.
- There are math errors.
- You brag a lot of about your big tax deduction. Someone may mention it to the IRS.
- You claim a loss on a hobby such as expenses for getting Fido ready for a dog show. Hobbies are not deductible.
- You make a careless mistake, such as transposing numbers in your Social Security number.
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