There are several reasons why the IRS can pay you a surprise visit out of the blue. To avoid this, we should be careful how we handle our taxes, personal and business income. Here are some reasons why the IRS can start looking into you;

INCORRECT BASIC INFORMATION

The IRS has a computer system that automatically screens tax checks. If you make some basic mistakes, it automatically triggers IRS tax evasion checks. For example, some simple number addition and subtraction errors, of course, most people now use tax returns self assessment software to enter, and rarely make such calculation errors.

In addition, if the Filing Status and Dependent you fill is in conflict with the tax forms declared by others, the IRS review will also be triggered. For example, after the couple divorced, both of them regarded their children as dependents, or they declared their adult children and old parents as dependents, but they filed taxes independently.

Solution: Before submitting the declaration formally, you should review it again and check for any omissions or errors. If errors and omissions are discovered after filing the tax return, it can also be corrected by filing the IRS Form 1040-X.

 

MISREPORTING AND UNDERREPORTING INCOME

Generally, you can’t make a fake income because of forms like W-2 form for employees, 1099-MISC form for self-employed persons, or 1099-INT, 1099-DIV and other forms of income such as interest dividends. You cannot be the only one who has access to the form. The IRS will also receive a copy. Therefore, all income must be truthfully declared and ensured to be fully declared, and cannot be estimated or fabricated casually. Once the IRS check finds that you did not report the relevant income, or the amount is incorrect, the tax inspection process will be triggered.

Solution: Keep all relevant tax forms. If you notice errors in W-2, 1099 or other tax forms, make sure you notify the IRS and also ensure to update the data to the IRS.

        

OWNING OVERSEAS ASSETS

The IRS is particularly interested in taxpayers who own assets and cash in other countries (especially those with tax laws superior to the United States). In 2010, the United States passed the FATCA (Overseas Account Tax Compliance Act), which requires overseas banks to identify U.S. asset holders and provide information to the IRS. It also requires taxpayers to declare on their own initiative. If you are a U.S. tax resident, and the total value of all your overseas accounts exceeds $10,000 at any time of the year, you must declare FBAR (FinCEN Report 114), and overseas assets worth $50,000 or more must report to the IRS Form 8938.

In other words, if you take the initiative to declare an overseas account, the chance of being taxed will increase; but if you conceal it, you will be fined if you find it, and you may be held liable.

 

TOO HIGH OR TOO LOW INCOME

High income is a key reason for IRS tax investigation. After all, the higher the income, the more complicated the tax return will get. Error rates also increase and if the problem is detected, the return (tax penalty) will usually be higher.

According to statistics, the IRS has a random check rate of less than 1% for people whose annual income is less than $200,000, while the random check rate for incomes higher than $200,000 has risen to nearly 4%, and the random check rate for incomes higher than 1 million is 12.5%. The same is true for corporate tax returns. Companies with assets less than US $10 million have only been checked for 1%, but companies that have exceeded the threshold of 10 million have checked for 17.6%.

Too little income is also easy to be targeted by the IRS. In 2016, 2.55% of those who reported unadjusted total income (AGI was $0) were spot-checked.

The people with the lowest spot checks in previous years were those with AGI / adjusted gross income between $25,000 and $200,000.

 

ITEMIZED DEDUCTIONS IS ABOVE AVERAGE

The IRS compares the spending levels of people in similar income ranges. If you choose Itemized Deductions to calculate taxes, and your expenses are much higher than the average person, they will be targeted by the IRS.

For example, donations can reduce taxes. Usually people with AGI between $100,000 and $200,000 report an average donation of $ 4,188. If your AGI is $150,000, there is probably no problem to declare a donation of $5,000, but if you declare $ 50,000, it will attract IRS attention.

Solution: All declared expenses must be kept in small receipts, and generous donations are completely safe. As long as all receipt receipts are kept, if a non-cash donation exceeds $500, it is best to have a formal valuation report as proof and fill the IRS Form 8283.

 

ENTERPRISES WITH LARGE CASH FLOWS

Businessmen who usually trade cash in restaurants, bars, hair salons, car wash shops, taxis, etc. are also the focus of the IRS. Although such a small amount of cash income will not receive a special 1099-MISC form, it must be reported truthfully.

If the IRS finds that your living standard does not match your declared income, it will check your taxes. For example, if you declare a very high mortgage interest expense, you should not be able to apply for such a large amount of loan based on the income you declare. In addition, many institutions, such as banks, merchants, casinos, etc., will actively report IRS more than $ 10,000 in cash access or transactions.

Solution: Keep good accounts and report all income truthfully.

 

 

SELF EMPLOYED

Self-employed people can enjoy many tax deductions that are not available to ordinary employees. For example, Home Office Deduction, business-related mileage, travel, dining, and even entertainment can be used as business expenses to reduce self-employment income. However, the IRS has a strict definition of these costs, and it is not allowed to arbitrarily report them.

For example, it is normal for an artist to declare paints and paints as business expenses, but if your profession is a lawyer and you like painting, you cannot report the paint and paint expenses to business expenses. Another example is that you only have one car, but you declare 100% of the car’s use expenses as commercial expenses, which is not acceptable. If your business expenses are 20% higher than those of other self-employed people of the same type, it will also cause IRS suspicion.

Solution: Separate the business use and personal use expenditure records completely. Record the location, name of customer, mileage, time and purpose of each commercial consumption, etc., and leave all relevant consumption documents.

 

DECLARE HOME OFFICE DEDUCTION

People who work from home can declare Home Office Deduction for tax avoidance, but the IRS definition of Home Office (home office) must meet the following two points:

·  Must be used regularly and only for work areas;

·  Must be your main business location;

If you have a fixed room for work in your home, you can declare this deduction; but if you only occasionally use the computer to reply to work emails in the living room, you cannot declare this deduction for the home office. Since many people are not sure about the definition of Home Office, the IRS will also look more at the tax return that has declared Home Office Deduction.

Solution: Learn more about Home Office Deduction according to IRS Publication 587.

 

LONG-TERM LOSS-MAKING BUSINESS

Doing business is to make money. If you lose money for a long time, there is no need to continue, right? If the IRS sees someone declare a full-time business, but has lost money for more than 3 years in the past 5 years, it will trigger the tax inspection mechanism.

Some people may mistake some “hobby” (such as photography, handicrafts, vineyard winery, etc.) that can make money as a business to file tax and enjoy the discount of business expenses deduction, this won’t work. IRS definition of hobby or business is very clear, for example, this activity is not for profit, you put time into this activity and attitudes, etc.  The IRS judge in the end nine factors is commercial or hobby.

Solution: If it is a personal hobby, the new tax law will no longer allow hobby expenses as a deduction list for tax returns, that is, you must declare income from hobby activities but not deduction. If it is a temporary loss at the beginning of the business, you can declare Form 5213 and let the IRS give you more time to prove that it is a profitable business; or be ready to prove to the IRS that this business has 3 Annual profitable data.

 

 

 

USE OF TOO MANY INTEGERS

If you have a lot of numbers ending in 0 or 5 in your tax form, it will also trigger an IRS tax check. Because the figures are too neat, it means that you are probably not doing accurate statistics, but are just “estimating” or even “faking”.

Solution: collect relevant documents, use the accurately calculated numbers, and keep records of all document reports.