Are You Provoking A Tax Audit?
Every taxpayer fears an Internal Revenue Service (IRS) audit. Visions of additional taxes, fees, and penalties are enough to make anyone dread an IRS audit as much as a root canal. In addition to the potential financial ramifications, audits also consume taxpayers' time and energy, and most of us are busy enough already.
As such, it makes sense to prepare your tax returns in a way that minimizes IRS scrutiny. Once the IRS flags a return, they look for anything they can dispute, even if it's unrelated to the original reason for the review. To lessen the chances of provoking an audit, use the strategies below when claiming charitable deductions, earning high (and low) income, claiming rental property losses, depositing cash, and reporting self-employed income.
Charitable Contributions
Charitable contributions provide a lifeline for many people and organizations in need. In fact, many charities perform essential social functions with no financial profit. Without these charities, the government might have to pick up the tab, so it makes sense for the IRS to provide tax deductions for charitable giving. To spot taxpayers who exaggerate their charitable contributions, the IRS uses a formula to compare income to the number of charitable deductions, and when contributions exceed a certain level, the IRS flags the return.
To avoid provoking an audit, fill out form 8283 for any non-cash donations exceeding five hundred dollars. Also, avoid the temptation to exaggerate the value of non-cash contributions. The deduction is always for the item's sale value at the time of the donation, not what you purchased it for. Keep this in mind when valuing deductions for items given to places like Goodwill Industries. A donated vehicle, for example, should be valued at what you could sell it for, not the dealer price. You must also keep receipts for all cash donations over 250 dollars, though the best practice is to keep all cash donation receipts for three years.
Continue reading to learn about earning too much or too little.