Forex Articles

There is perhaps no single word in the financial dictionary that triggers as much fear and trepidation as the word audit. Many taxpayers have nightmares about having to deal with this, but those who follow the rules and report their income and deductions correctly can rest easy knowing that they will be in the clear even if this does happen. But be sure to avoid the following audit triggers when you file your return.

• Claiming shady deductions – If you donated a broken old sofa to charity and claim a $500 deduction for it on your tax return, be sure to get a receipt from the qualifying charity that has that amount printed on it. Claiming this deduction without that proof will likely result in the IRS disallowing the deduction. You should ideally have written documentation of any deduction that you take, regardless of whether it is for charity, business or personal expenses. (For more, see: 6 Tax Deductions That Might Get You Audited.)
• Early IRA or qualified plan distributions – If you have taken an early distribution from your IRA or qualified plan, then you need to be able to prove that it should be exempt from the penalty because the distribution falls under one of the qualified exceptions or else you need to report the distribution as an early withdrawal. The IRS has discovered that nearly half of all filers who take early distributions fail to report them correctly on their returns, so be sure that you are either following the rules for an exception or else be prepared to pay the tax and penalty.
• Failing to report income – If you have a nice little side business going that nets you an extra $1,000 per month, be sure to include it on your tax return. If the IRS finds out that you have been receiving this income for years and not reporting it, they will assess you a bill for the tax that you owe going back for at least seven years or the amount of time that you received the income. Criminal penalties may also be assessed for those who fail to report large amounts of income. (For more, see: What to Do If You Get Audited.)
• Reporting substantial losses – If you were involved in a failed business dealing that resulted in a large loss, be sure to keep thorough documentation of that loss before claiming it on your return. The IRS is aware that some taxpayers have tried to write off large losses that only existed on paper and were never truly incurred. They will most likely investigate any substantial loss claimed on a Schedule C or E that substantially reduces the filer's tax liability for the year. Reporting losses from hobbies, home office expenses or other non-business endeavors can also raise eyebrows when your return is filed.
• Offshore income and investments – Just because you have money in another country doesn't mean that you don't owe the IRS for the income you received from it. All foreign accounts that are worth at least $50,000 in U.S. dollars must be reported each year, and you have to pay the IRS even if you yourself are out of the country when you file. (For more, see: 10 IRS Audit Red Flags.)
• Having a high income – Even if you studiously report all of your income and deductions correctly each year, you may still get audited if you make more than a certain amount. The IRS simply does this because the amounts of money in question are generally larger.

These are just some of the possible reasons that your tax return may be audited. But as long as you are being honest and have properly documented your deductions and income, then you should be in good shape. There are times when the IRS will simply select a return at random for an audit without there being any special reason. If this happens to you, simply provide them with your documentation and everything should be fine. (For more, see: Surviving the IRS Audit.)