Now that we know that the chances of being audited are low, the question becomes, what are some “red flags” that will increase the chances of your return being part of the “chosen few”.
Claiming an alimony deduction increases focus by the IRS. The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off do not satisfy the requirements. Mismatching between the payer and the recipient on their respective returns will almost certainly trigger an audit or at least an IRS notice. This will become even more complicated with the Tax Reform passed at the end of 2017 with regard to alimony.
Continuous years of business losses may result in further inquiry by the IRS. Several years of Schedule C or F business losses from an activity that appears to the IRS to be a hobby can wave a red flag. To determine if you have a hobby or a business, ask yourself: is there a profit motive or expectation central to the activity (business), or is it simply a pastime offering an occasional chance for financial gain (hobby)?
Foreign activity may raise attention. Failure to report financial interest or signature authority over foreign financial accounts with a combined total of more than $10,000 at any time during the year will cause your return to be investigated. The IRS is intensely interested in people with money stashed outside the US, especially in countries with the reputation of being tax havens.
Nathan Cacka is a Certified Public Accountant with Cordell, Neher & Company, PLLC, a Wenatchee public accounting firm. Nathan may be reached at 509-663-1661 or nathan@cnccpa.com.