- Personal Finance
Top 10 IRS Tax Audit Red Flags in 2011
The IRS is Watching for These Mistakes
The U.S. Internal Revenue Service is pivoting back to playing cop after years of publicizing its kinder and gentler side. The number of liens and levies are up sharply over just 12 years ago. And President Barack Obama is urging Congress to give the taxman 5,000 new employees, most of whom will be tasked with enforcing the tax laws. The trick to avoiding the heavy hand is to avoid making dumb mistakes that will get an auditor’s attention. This Hub details the 10 biggest mistakes for which the IRS is on the lookout:
1) Stashing money in secret offshore bank accounts. The IRS has been cracking down on this hard after learning the identities of tens of thousands of Americans who hid money in Switzerland a host of tax havens. It’s perfectly legal to have an offshore account, so long as you declare its existence and report the income to the IRS. Failure to do so can leave you owing taxes and penalties in excess of the account’s value and result in a prison sentence.
2) Failing to report gambling income. This goes on Line 21 of the 1040 (also, Line 28 of Schedule A.) Neglect to do this and you could face charges of tax evasion.
3) Not letting your employer withhold enough taxes. Or, if you’re self-employed, failing to pay enough quarterly. This is especially tricky for 2010, as the Making Work Pay Credit complicated some withholding schedules. A mistake could cost you a bundle in penalties.
4) Falsely claiming the First-Time Homebuyer Credit. Sure, that $8,000 is tempting, but the IRS is wise now to the fraud. Only sales contracts signed before April 30, 2010 that closed by Sept. 30 qualify. And the IRS wants to see the documents as proof with your tax return. You must also file your return on paper, which ensures extra scrutiny.
5) Not paying taxes on tips and unemployment income. Yeah, jobless benefits are taxable.
6) Ducking the Nanny Tax. If you pay a household worker more than $1,700 last year, you have to pay employment taxes for them. Use Schedule H. Also consider paying those payroll taxes quarterly; there are steep penalties for underpaying through the year.
7) Failing to report gifts that exceed $13,000. You can run afoul of estate and gift tax rules. You can give $13,000 each to as many people as you like ever year. Higher amounts given must be reported to the IRS and are either taxable to you or count against a lifetime allowance of $5 million for lifetime giving (note: the allowance is scheduled to be reduced to $1 million in 2013.)
8) Claiming excessive charitable donations. While you only technically need detailed receipts for cash donations above $250 and non-cash contributions of over $500, your safest bet is to get a receipt for anything given to charity these days to satisfy an IRS auditor. Any good worth more than $5,000 requires an appraisal. And don’t get cute about valuing your used underwear. It’s only worth what it would fetch in a thrift store.
9) Inflating business expenses. Don’t try to deduct personal expenses such as a vacation as one for business. The IRS is on the lookout for this.
10) Failing to file a tax return. Only if you’re really old and poor, you have to file annual paperwork with the IRS. Not doing so is just begging for trouble and could land you in jail.