Blog

 

Tax Season Tip: How to Avoid an IRS Audit

March, 2021

Courtesy of our Partners at TaxRite.

Just 0.45 percent of taxpayers were audited in fiscal year 2019. Still, with taxes becoming more complicated every year, there is an even greater possibility of confusion turning into a tax mistake and an IRS audit. Avoiding "red flags" like the ones listed below could help.

Red Flags That Trigger IRS Audits

Claiming Business Losses Year After Year

When you operate a business and file Schedule C, the IRS assumes you operate that business to make a profit. Claiming losses year after year without any profit raises a red flag with the IRS.

Failing to Report Form 1099 Income

Resist the temptation to under-report your income if you are self-employed or have a second job. The IRS receives the same 1099 forms that you do, and even if you didn’t receive a Form 1099 when you think you should have, you can't be sure the IRS didn't either. If the IRS finds a mismatch, you are sure to hear about it.

Early Withdrawals From a Retirement Account

In general, if you withdraw money from a retirement account before age 59 1/2, you will need to pay a 10 percent penalty. You will also owe income tax on the amount withdrawn unless you qualify for an exception. Sometimes - but not always - these types of early withdrawals trigger an audit, typically a correspondence audit where the IRS sends you a letter.

Hobby Losses

Income derived from a hobby such as operating a vineyard or breeding horses must be reported on your return. Expenses are deductible up to the amount of that income. On the other hand, you can only deduct losses if you run your hobby like a business, i.e., with a reasonable expectation of making a profit. Most hobbies that make a profit in three years out of five are considered a business.

Excessive Business Expense Deductions

Too many deductions for your income and type of business, claiming 100 percent use of a car for business, and inflating business meals, travel, and entertainment expenses are examples of excessive business expenses that could raise a red flag. Always save receipts and document your mileage and expenses.

Overestimating Charitable Deductions

Taxpayers that don't itemize can take an above-the-line deduction for charitable contributions made in tax year 2020 on their tax returns of up to $300 for qualified charitable cash donations that reduce taxable income. The maximum amount for 2020 tax returns is $300 (i.e., not $600), even if you are married filing jointly.

For taxpayers that do itemize, taking disproportionately large deductions as compared to your income could raise a red flag. The IRS keeps records of average charitable donation at various income levels, and even if you inherited a large sum of money and want to donate it to charity, there's a chance you could get audited.

Failing to Report Winnings or Claiming Big Losses

Professional gamblers report winnings/losses on Schedule C, Profit or Loss from Business (Sole Proprietorship). They can also deduct costs related to their profession, such as lodging and meals, for example. Gambling winnings are reported on Form W-2G, which is sent to the IRS. As such, you must report this income. You may deduct gambling losses, but you must itemize your deductions on Schedule A (Form 1040) and keep a record of your winnings and losses. Ordinary taxpayers (recreational gamblers) report income/losses as "Other Income" on Schedule 1 of their Form 1040 tax return.

Any accounting or tax advice contained in this communication is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

Legal Club offers plans that include a Free Tax Preparation and Advice benefit. This benefit provides annual savings of approximately $250 - $300 on preparation of State and Federal Tax Returns as well as valuable tax advice. To learn more about the plans offered by Legal Club, browse this website or call us at 800-305-6816.

Blog List

 

Return to Blog Overview

APRIL, 2022
How to Reach Your Financial Goals

MARCH, 2022
Ways Credit Counseling Can Help You Pay Off Debt

FEBRUARY, 2022
How Working Remotely Could Affect Your Taxes

JANUARY, 2022
Important Tax Information for 2022

DECEMBER, 2021
New Year's Resolutions for 2022

NOVEMBER, 2021
How to Boost Your Annual Enrollment Strategy

OCTOBER, 2021
Join Legal Club in Supporting Breast Cancer Awareness Month

SEPTEMBER, 2021
Incidences of Identity Theft are Rising Due to the Pandemic

AUGUST, 2021
Has the Value of Voluntary Benefits Increased Due to the Pandemic?

JULY, 2021
Does Your Sales Message Stand out?

JUNE, 2021
Financial Wellness - An Important Part of Any Comprehensive Employee Benefits Plan

MAY, 2021
Account Rounding - Another Way Legal Club Helps Employee Benefit Professionals

APRIL, 2021
Estate Planning - One of the Many Ways Group Legal Benefits from Legal Club are Meaningful

MARCH, 2021
Tax Season Tip: How to Avoid an IRS Audit

FEBRUARY, 2021
Tax Filing Season Starts February 12

JANUARY, 2021
Important Tax Changes for 2021

DECEMBER, 2020
The Added Importance of Voluntary Benefits In The New Year

NOVEMBER, 2020
5 Reasons Why Employers Should Offer a Group Legal Plan

OCTOBER, 2020
Legal Club Supports Breast Cancer Awareness

SEPTEMBER, 2020
It's Never Too Early to Check Tax Withholding

AUGUST, 2020
9 Questions That Explain Why Plans From Legal Club Provide Meaningful Benefits For Everyday Life

JULY, 2020
Overcoming the Pitfalls of Home Buying in the New Normal

JUNE, 2020
Advice For Attorneys During Uncertain Times

Meaningful Benefits for Everyday Life

Legal, Tax, Identity Theft solutions and more

Corporate Headquarters

7771 W. Oakland Park Blvd., Suite 217

Sunrise, Florida 33351-6796

Toll Free Main 800-316-5387

Local Main 954-377-0222

Fax 954-267-0401

info@legalclub.com

Legal Club provides group legal, tax, ID theft solutions and other benefits to more than 2,000,000 working Americans and their families. Legal Club's suite of products can be tailored to meet the needs of evolving employee populations and are designed to provide maximum value and flexibility. Partnering with agents, brokers, consultants and other distributors, Legal Club has provided meaningful benefits for everyday life to organizations around the country for more than two decades.

Legal Club is a proud sponsor of BCRF, donating 2% of revenue from new group cases each year. Learn more >

© 2022  Legal Club of America. Privacy Policy | Disclaimer