Here are Some Red Flags for 2022
We all dread facing an IRS audit. The risk is relatively low – the IRS only audited .04% of all returns in 2019. The agency performs complex statistical analyses to determine which returns to audit. But in your personal and business finances, it is possible to predict what will raise the eyebrows of IRA agents. Here are some red flags that can result in an audit in 2022.
Not reporting all taxable income.
For employees and independent contractors, the IRS gets copies of all 1099 and W-2 forms that you receive. Failing to report any income is a sure-fire way to trigger an audit. Banks and brokerage firms also report information to the IRS, so the lack of a form won't necessarily allow you to avoid scrutiny.
Claiming higher than average deductions, losses, or credits.
If the losses, deductions, or credits you claim on your return are disproportionately high compared to your income, this may raise red flags with the IRS. Claiming large losses from the sale of investments or rental property can also warrant a second look. But if you have documentation for your losses, don't be afraid to claim them.
Running a business.
Schedule C is a gold mine of tax deductions for the self-employed. As a result, the IRS looks closely at sole proprietorships and smaller businesses with high income to ensure that you report all taxable income and don't claim excessive deductions.
Claiming 100% business use of a vehicle.
When you depreciate a car, you must also list the percentage of use that was business-related on Form 4562. It's rare for someone to use a business vehicle for no personal use, which can trigger a second look from the IRS.
Not reporting a foreign bank account.
If you have money stashed outside the U.S., the IRS wants to know about it. You can face serious penalties for failing to report a foreign bank account. You'll need to report foreign accounts that total more than $10,000 at any time during the previous year.
Making virtual currency transactions.
The IRS is cracking down on unreported income from virtual currency transactions. Now, all individual filers must report on form 1040 whether they've engaged in virtual currency transactions. The IRS has also gone to federal court to get the information of some virtual currency account holders and is setting up teams of agents to handle cryptocurrency-related audits.
Making a lot of money.
If you make more than $100,000, you are 500% more likely to face an audit. You can't avoid an income-based audit; the IRS simply scrutinizes the income taxes of high-earning individuals more closely.
Hire a Skilled Tax Attorney
For complex tax situations, especially for business owners, the reporting process can be a minefield. You should ensure you have tax and legal advice and guidance from an experienced tax attorney. The skilled tax attorneys at Gabaie & Associates, LLC can help. We have years of experience solving complicated tax problems for our clients before they become critical. Contact Gabaie & Associates, LLC online for a free consultation or call us at 410-358-1300.