Cnn tax-tips

10 Tax Audit Red Flags

BY BLAKE ELLIS @BLAKEELLIS3

8/25/2014 You're very charitable - 10 tax audit red flags - CNNMoney

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Be careful not to overstate your good deeds. The

IRS has calculated the average donation level for

each income range, so anything that far exceeds

those amounts could cause the agency to take a

second look at your return.

You're required to keep receipts for any

donations exceeding $250, and to fill out Form

8283 for any non-cash donations exceeding $500.

Related: 12% of Americans say it's OK to cheat

on taxes

And be realistic: non-cash donations are where a

lot of people often exaggerate, so remember that

the items you're giving to Goodwill should be

valued at the price someone would actually pay for it -- not the amount you bought it for years ago.

"What you think it's worth probably isn't what the IRS thinks it's worth," said Pat Connolly, a tax partner at BlumShapiro.

NEXT: You deduct your home office

BY BLAKE ELLIS @BLAKEELLIS3 - LAST UPDATED JUNE 03 2014 01:29 PM ET

10 tax audit red flagsFrom being too charitable to claiming the home office deduction, beware these tax audit red flags.

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The home office deduction is one of the most

complicated and abused deductions in the tax

code, which is one of the reasons the IRS is

introducing a new, simplified option for claiming it

this year.

In the past, taxpayers who claimed the home

office deduction were required to fill out a

separate form calculating the percentage of their

home's space used solely for the business and the

percentage of expenses that apply to the office,

which can be very complicated to figure out.

But starting this year, you can simply claim $5 per

square foot of workspace, up to 300 square feet.

The deduction will be capped at $1,500 per year and the form for claiming it will be simplified.

That doesn't mean there isn't still room for error, however. The IRS's definition of a home office remains unchanged, and this is where a lot of

people get confused or try to stretch the rules. So remember, just because you work from home a couple days a week or check work emails from

your kitchen doesn't mean you can claim the home office deduction. Your home office must be your primary place of business and used

exclusively for work.

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Air conditioning for an excessive sweating

disorder, a nose job for a wine taster -- bizarre

deductions like these are likely to spark suspicion

from the IRS. But don't let that stop you from

claiming them if they are legitimate. Both the nose

job and the air conditioning unit were allowed, for

example.

But others, like used underwear donated to

charity or medical bills for pets, were not. So don't

stretch the limit too far, and when in doubt, ask a

tax professional before turning yourself into a

target for the IRS.

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Being rich has its benefits, but not when tax

season rolls around. The more income you report,

the higher the likelihood you'll get hit with an

audit.

While the audit rate stands at a low 1% overall, it

jumps to 9% for people earning between $1

million and $5 million and to an even higher 18%

for people with incomes between $5 million and

$10 million. Among those earning $10 million or

more, 27% face audits.

Related: 4 ways the rich will pay more this tax

season

To avoid being forced to share your wealth with

the IRS, be sure to keep up-to-date records of all income, donations and other transactions.

"The better documentation they have and the more organized they are, the less headaches they will have down the. It's really important to

maintain good records," said Jordan Niefeld, a certified public accountant at tax firm Gerstle, Rosen & Goldenberg, P.A.

NEXT: You claim the same child someone else does



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If your ex files their taxes before you and claims

your child as a dependent, the IRS is going to be

very suspicious when your return comes in

claiming that same child as your dependent.

This often happens when a couple gets divorced

and one parent has primary custody, but the

other still tries to claim the child as their

dependent. Or when a grandparent is the sole

caregiver, but the parent still claims the child as

their own.

Even if you're in the right, the IRS may force you

to provide extensive proof that the child you are

claiming does indeed qualify as your dependent.

"This can happen year after year, even after proving to the IRS you are the one who is correct in deducting the child," said Al Giovetti, a CPA in

Maryland and a member of the National Society of Accountants.

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The IRS has been on a crusade to retrieve money

that's been illegally stashed in overseas accounts.

So even if you have money in a perfectly legal

account abroad, you need to report it or you could

be in big trouble.

Failing to disclose assets exceeding $10,000 that

are held in offshore accounts could result in

penalties, including a fine of up to $100,000 or

50% of the account balance, whichever amount is

greater.

"There are some very wealthy people who

intentionally disregard the rules, but then there

are those people who disregard the rules without

realizing it," said Connolly. "It's better to be safe than sorry (and report everything)."

NEXT: You claim the Earned Income Tax Credit



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Fraudsters love the Earned Income Tax Credit, a

refundable credit of as much as $6,000 depending

on your income and how many children you have

(the more children, the bigger the credit). That's

why the IRS tries to make sure that this credit is

only doled out to people who deserve it.

Related: Beware these 'dirty dozen' tax scams

To find out if you qualify for the EITC, use this

tool on the IRS website. And if you claim the

credit, make sure you have documentation

including the Social Security numbers for all of

your children and proof that they live with you --

like letters from their schools or doctors that were

sent to your address, said Giovetti.

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Most employers reimburse you for driving-

related costs like gas. So if you try to deduct

hundreds or thousands of dollars' worth of

automobile costs as a business expense, that's

going to raise eyebrows at the IRS.

"If you happen to work for an employer who

doesn't have a policy for reimbursing you for auto

expenses, the IRS would want to understand your

employer's policy, since generally companies will

reimburse you for any expenses related to the

business," said Connolly.

And if you own a business, you can only deduct

business-related costs. The gas you buy for your

personal driving costs cannot be mixed up in that, or the IRS will ask for documentation of everything.

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Who wouldn't like to turn their favorite hobby

into a business? Year after year, taxpayers

continue to report losses on their taxes from

businesses that are really just activities they like

to do for fun.

But the IRS won't be fooled. The general rule of

thumb is that if the venture hasn't earned a profit

in three out of the last five years, it's usually not a

legitimate business.

Dave Du Val, vice president of customer advocacy

at TaxAudit.com, represented a client in an audit

who had set up a side videography business

where he filmed weddings and special events. It

was his first year in business and he reported a loss. The IRS came after him, saying it was just a hobby and not a business. But after providing

documentation of expenses like advertising costs and showing records of meetings with business strategy experts, it was approved and the

client was let off the hook.

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For many people, reporting income is pretty

straightforward. But for those who earn money a

variety of different sources, it can be easy to

forget a stray account.

Giovetti says some clients forget about small

brokerage accounts they have, and since the IRS

receives information from brokerage firms

directly as well, there's a good chance you'll be

contacted if your records don't match what the

IRS receives. Because investment firms aren't

required to submit documentation for their

clients until the end of the February, it's often a

good idea to wait until the beginning of March to

file your return to make sure the reporting lines

up.

If you worked side jobs and earned more than $600 at any one of them in a year, those employers should send you a Form 1099 so you can

report that income on your taxes as well.

"If you left something off your return, you can be pretty sure the IRS will find out about it," said Connolly.

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