Do you know how to avoid an IRS tax audit? Find out how the IRS selects tax returns to audit, how you can avoid being chosen for a tax audit, and what to do if you are chosen for a tax audit. http://j.mp/MoneyBooks
Money Girl
213 MG Tax Boot Camp: Session 2
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Hi everyone and welcome back to the Money Girl Podcast. I'm Laura Adams, the author of Money Girls Smart Moves to Grow Rich. This is the second post in a three-part series we're calling tax bootcamp because Uncle Sam wants you but he also wants your money. You're probably familiar with the term tax audit. That's when the IRS picks you as one of the lucky ducks to check up on. The IRS calls it a quote examination and they can review an individual's or an organization's financial information to make sure that what's reported on a tax return is in line with the law. In this podcast, you'll learn how the IRS selects tax returns to audit, ways to avoid being chosen for an audit and what to do if the IRS picks you out from the crowd. In recent years, less than 2% of all income tax returns have been audited but the audits done in 2009 alone brought the IRS close to $50 billion in additional tax revenue. Though the IRS doesn't reveal their super secret audit selection formula, there are some things that make you more likely to get audited, so we'll review those red flags. The IRS computer program assigns each tax return a score and the higher the score, the more likely you are to have underpaid taxes and therefore to be chosen for an audit. You can also be selected for examination when the tax return of someone close to you, like a business partner is audited, or if a whistleblower, like an angry ex-spouse or an employee, turns you in. Tax returns can also be selected at random, so you can be chosen for no reason other than pure statistics. So let's focus on some of the issues that can increase your chances of being audited. You might not be able to do anything about them, but you can take extra care not to shine a light on your return by making any unnecessary errors. Tax audit red flag number one, unreported income. Since taxes are calculated on how much money you make, not reporting all your income from various sources is a big mistake that shorter result and further scrutiny. Don't forget that you may have income from bank accounts, the sale of investments or real estate and alimony, for instance. If you innocently forget to report even a small amount of taxable income, the IRS will find out when they match records submitted by the people and companies that page you. The IRS receives duplicate copies of all the forms you receive and eyebrows are raised when information on your tax return doesn't match up to a form W2 or a form 1099, for instance. If you didn't receive a tax form for some of your income, don't assume that the IRS won't know about it. Be sure to contact the payer and request a copy of the tax form so you can submit it along with your return. Tax audit red flag number two, cash income. The IRS knows that businesses and people who get paid in cash are more likely to underreport their income. If you make money that isn't reported on a form W2, that could trigger an audit. So be careful to report cash tips if you're a restaurant server, a taxicab driver or a bartender, for instance. Tax audit red flag number three, high income. As your income goes up, so does the likelihood that you'll be audited. If you make more than a million dollars, your chances of being audited are over six times higher than if you make less than 200,000. Tax audit red flag number four, high deductions. In the first episode of tax bootcamp, I covered tax deductions and tax credits. If your itemized deductions exceed certain thresholds for your income, for example, you claim a really big charitable donation that's a significant percentage of your pay, then you could be singled out for an audit. That doesn't mean that you shouldn't claim every deduction that you're entitled to. It simply means that you need to have good records to back up what's on your tax return. Tax audit red flag number five, self-employment. If you own a business or work for yourself, there are lots of expenses you can deduct, like work-related entertainment, travel and equipment. Because the line between personal and business use can be crossed so easily, self-employed taxpayers are targeted more frequently for an audit. You spent over here. Now at T-Mobile, get four 5G phones on us and four lines for $25 a line per month when you switch with eligible traders. All on America's largest 5G network. Minimum of four lines for $25 per line per month with auto paid discount using debit or bank account, $5 more per line without auto paid plus taxes and fees and $10 device connection charge. Phones would be a 24-month in bill credits for well qualified customers, contact us before canceling entire accounts to continue bill credits or credit stop and balance on a required finance agreement to bill credits and if you pay off devices early, ctmobile.com. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. Ixcel is an online learning program for kids covering math, language arts, science and social studies. Ixcel has interactive practice problems for topics from pre-K to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards and explanations for wrong answers. Ixcel figures out what your kids need more help with and recommend more topics to practice. There are videos, lessons, sample problems and learning games too. One subscription to Ixcel gets you all subjects and all grade levels. 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During congestion, customers on this plane may notice speeds lower than other customers and further reductions using greater than 1.2 terabytes per month due to data prioritization. After $20 bill credit, plus $5 per month without auto pay. If I can't reply, regulatory is included for qualifying accounts. $35 connection charge applies. Tax audit red flag number six, home office deductions. The tax rules for deducting home office expenses can be complicated, and that's why the IRS tends to audit taxpayers who work from home. If you're a website designer with a home office who earns $40,000, it would look strange for you to take $30,000 in deductions. Be sure that you don't try to deduct items that aren't used for business. If you do have a lot of deductions, make sure you have documentation to prove that they're a valid part of your job or business. Tax audit red flag number seven, automobile deductions. Another deduction that's commonly audited by the IRS is vehicle use for your job or business. It's really important to keep good records of all your transportation expenses and a mileage log that clearly shows how many business miles you've driven during the year. Tax audit red flag number eight, complex transactions. If you claim complex or unusual expenses on your return, it's wise to provide an explanation before the IRS has to ring you up and ask for one. Submit a note with your return explaining why you have an unusual situation or why you're missing a particular tax form, for instance. Whenever you have a fairly complicated tax situation, like owning rental property, being a business owner or having a home office, it's a good idea to let a tax accountant do your return. They'll make sure everything is legitimate and that you have the right paperwork to back up your claims. But remember that as the tax payer, you're the one who's legally responsible for what's submitted to the IRS, so choose your tax preparer carefully. If you do receive a notice from the IRS asking for additional documentation or informing you that you've been selected for an audit, respond right away. It doesn't mean you've done anything wrong. The IRS may just need clarification from you. However, if you're worried, you may want to be represented by a CPA who specializes in taxes or by a tax attorney to make sure you come out on top or at least that you end up owing the IRS as little as possible. If you like the tips you get in the Money Girl podcast, you'll like my book, Money Girl Smart Moves to Grow Rich. I devote a whole chapter to taxes so you can be sure you know what you should. The book tells you everything you need to know about money without bogging you down with what you don't. It's available at your favorite bookstore in print or as an e-book for your Kindle, book, iPad, PC, Mac or Smartphone. You can even download two free book chapters at smartmovestogrowrich.com. You can connect with me on Twitter. My username there is @laraadams. I'm also on Facebook. Just do a search for Money Girl. Submit your money questions through social media or email me at money@quickanddirtytips.com. I'm glad you're listening. Chaching. That's all for now. Courtesy of Money Girl. Your guide to our richer life. [music] Imagine earning a degree that prepares you with real skills for the real world. Capella University's programs teach skills relevant to your career so you can apply what you learn right away. Learn how Capella can make a difference in your life at capella.edu. When you need meal time inspiration, it's worth shopping king supers for thousands of appetizing ingredients that inspire countless mouthwatering meals. 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