Tax return filing is one of the most complicated and dreaded process of the year for any individual or company. In addition to this process if you owe money to government it is really annoying. But nothing can be compared to the feeling when you receive a notice from IRS that you are under audit as your return has been red flagged. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill.
Here is a list of few mistakes due to which your tax form can be red flagged: -
- Discrepancy / Variances between (business) income and (business) expenses
IRS will respond when your reported income does not match with tax form income, similarly the same thing happens with businesses that report the expenses which makes no sense. Sometimes, they are finding people who are trying to take deductions for personal expenses in the name of business, for e.g.: - A musician can claim a guitar, but a painter buys the same for personal hobby cannot do the same. We need to understand the difference. Many times, these discrepancies result because of unreported income for actual expense incurred. There is always the chance that the difference is a result of accidents by employees or oneself hence we need to be very sure and double check before filing the tax forms.
- Showing enormous charitable donations
The tax system has awarded us with tax deductions against charitable contributions. This benefit has always not proven as an incentive always but also as a temptation for some individuals. But we need to know that to stop the abusive use of the benefit, IRS has created an automated computer program that analyses almost every return to identify outsized charity figures as compared to individual’s income. E.g. – you earn $ 30K out of which you are contributing $ 15K, which is very likely to raise queries and there is good chance that you are headed for audit.
- Lack of understanding of filing status
The head of filing status is extremely useful, it can also be confusing and lead to mistakes when filling out status, and especially regarding how dependents are treated. Though the Tax Cuts and Jobs Act of 2017 was supposed to simplify the tax form process, in this particular area it made things even more complicated by introducing a new $500 credit for ‘qualifying relatives’, which is defined by certain tests that may make people not related to the taxpayer eligible as a dependent while not making the taxpayer eligible for the head of filing status.
- Non-disclosure of overseas income
If you are a U.S. citizen or U.S. resident with interest in, authority over, or have signatory authority on foreign financial accounts that exceed $10,000 at any time during the calendar year irrespective of whether it generates taxable income or not, you are required to report them to the U.S. Treasury Department under the Bank Secrecy Act. The appropriate form to be filed is the Report of Foreign Bank and Financial Accounts, or FBAR. If an individual fails to do so then they might have to face some serious consequences for the same as this fault is very likely to be discovered by the IRS.
Inflated rent expense is one of the most common reason for tax return to be red flagged. Individuals who file their own returns and claim deductions have to be very sure and should fully understand whether the rent deductions are allowed or they need to be capitalized. Lack of understanding of the same can result into tax form being red flagged. There are certain complicated guidelines for room rentals, vacation home etc.
- Failed to report cryptocurrency
Introduction to the Bitcoin and other cryptocurrency have added an additional headache in filing the tax returns, as from last few years approx. 10,000 individuals have failed to report income and losses on this special currency. The department is taking special care and keeping a watch on this red flag. They have added certain questions regarding the sell and purchase of this currency which will help people to file correct return and not be red flagged.
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