February – the month of romance, Valentines and a hint that spring is on the way. It’s also the month you receive all those 1099’s, W-2s and other tax forms in the mail. The taxman cometh so we must prepare.
There are several things that will make the taxman take a second look at your return - as in an audit. That dreaded word can send chills up your spine. Even if you’re completely in the right, the audit itself can be costly in time alone. Normally, individual audits occur in approximately one in 100 people, however the more money you make, the odds are you’ll be audited.
Why do some people get audited? One thing the can invoke an audit is making over $200,000 or more. If you make over $200,000, you have an audit rate of 3.26%, which equates to one out of every 30 returns. If you make over a million dollars, your audit rate is one out of every 9 returns. We all want to make a million, just be prepared the more you make the more likely you’ll be audited.
The IRS has great computers – make sure your income matches all those 1099s, W-2s and other forms you receive this month. If the numbers don’t match, the IRS computers will spit out your tax return faster than you can say boo. If there’s a discrepancy in numbers, contact the company or person who issued the tax form immediately. They’ll need to issue a corrected form.
The IRS has formulas they’ve used for years regarding charitable contributions. If you try to write off an amount that is disproportionately larger than compared to what your income is, the computers will spot that and a red flag will be raised. Make sure you have receipts for the contributions, appraisals for high-end or valuable donated property, and file Form 8283 for noncash donations over $500.
The IRS is looking closely at rental real estate losses, especially if you claim to be a real estate professional. The IRS began this ‘auditing project’ 3 years ago and have been so successful, they’re continuing these audits. The IRS will check if you worked more than 50% of your working hours and 750+ hours each year as a developer, broker, landlord etc. If you did work those hours, you can write off losses without limits. If you didn’t work those hours, your losses have to be commensurate to your adjusted gross income (AGI).
The IRS is looking at your tax return if you claimed 100% business use of a car. Make sure you have a detailed log on your road trips. Keep a notebook in your car, or jot down on your computer every time you get in the car and use it for business. If you claim actual expenses for car maintenance, insurance and other expenses, you can’t claim the IRS standard mileage rate.
The IRS will look at any income you make from a hobby, but you can’t claim a loss from that hobby unless you have a “reasonable expectation” of making a profit. If you make a profit 3 out of 5 years, the IRS will presume you’re in business to make a profit. It’s always wise to run your hobby in a business manner with supporting documentation in case you’re audited. Any earnings from a hobby must be reported.
For the best options of avoiding a tax audit, or if you are audited, have an IRS dispute or looking for solutions to your tax problems (tax debt, tax investigation, litigation, repayment, stopping garnishments or other tax issues), contact Gantenbein Law Firm's tax attorney at 303 618-2122. From our offices in Denver, we serve all of Colorado.
Our tax attorney is one of the best tax attorneys in Denver: read all about Denver tax attorney Tyler Murray here.