Each tax season, individuals meticulously prepare their federal and state tax returns, aiming to avoid any errors that might pique the IRS’s interest. However, certain actions on these returns can act as beacons, drawing the attention of the Internal Revenue Service.
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Income Discrepancies
Are you engaged in any side hustles? If so, your income might not solely appear on your W-2 form but could also be documented on a Form 1099. According to insights from Robert Persichitte, a CPA at Delagify Financial, and Lei Han, a CPA and accounting professor at Niagara University, it’s essential to include all amounts from 1099s in your gross income.
If you mistakenly ignore a 1099 or fail to report its amount on your tax return, the IRS is already in the know prior to you filing your taxes.
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Excessive Business Losses
If your business shows losses surpassing its revenue, there must be a substantial justification. As suggested by Persichitte, the running joke in tax circles is about writing off a luxury car annually.
“Under Section 179’s bonus depreciation, many opt to buy a vehicle and utilize the entire expense against business income — a legitimate strategy,” explained Persichitte. However, some attempt to justify writing off a $50k+ vehicle with less than $5,000 in revenue, a practice that clearly defies sound business logic.
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Round Numbers
The IRS tends to raise an eyebrow when precise deductions are claimed, particularly by business owners. CPA Preeti Shah highlighted the agency’s scrutiny towards rounded expenses on tax returns. For instance, listing advertising costs at exactly $5,000 or legal expenses at precisely $3,000 can attract IRS attention.
Extravagant Business Expenses
Though many freelancers and self-employed individuals leverage Schedule C to claim legitimate deductions, it’s crucial not to overextend on business expenses.
Familiarize yourself with the distinction between deductible and non-deductible expenses. While a business-related lunch can be deducted, your routine groceries cannot.
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Generous Charitable Contributions
Excessive charitable donations relative to income can grab IRS attention, warned Han.
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This article originally published on GOBankingRates.com: I’m an Accountant: These 5 Red Flags Could Spark Interest From the IRS
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