Top 5 Red Flags the IRS is Looking for in 2019
As you start thinking about pulling together your taxes do you instantly get nervous like you did something wrong before you even get started? The reality is the IRS isn’t looking over your shoulder and they aren’t coming to knock on your door. In fact, they aren’t even thinking of you – until you get their attention.
Think of filing your taxes a lot like driving on the highway. If you are going 68 mph when the speed limit is 65 mph the state trooper won’t even notice you. But, if you are flying down the highway at 120 mph, that’s a different story and you better believe you’re getting stopped.
Writing off a reasonable portion of your cell phone bill is like going 68 mph, but here are five red flags that are more like speeding at 120 mph and will quickly put you on the IRS’s radar for an audit.
1.Huge round numbers – mileage is a great example.
No one travels exactly 20,000 miles for work in a given year. Even though your guess may be really really close to the actual amount, the IRS is trained to look for obvious, fraudulent or inflated numbers. These are a dead giveaway. However realistic, you don’t want to invite them in for further questioning. One of our favorite sayings is figures don’t lie, but liars figure! Which is oh so true while trying to fill out your tax return. If you are looking for a great way to stay organized while claiming all those business miles, check your app store for free apps that track it all and help categorize your business and personal trips.
2. More than one person claiming the same dependents
We see this most often with divorced couples. If you have kids, you know that claiming them as a dependent on your tax return is a huge tax break and will boost your refund significantly. The tough part is deciding on who is claiming the kids between disagreeing divorced parents. You thought court was messy, you don’t even want to know what untangling that mess looks like at the IRS. For more specifics, check out the IRS resources on divorced or separated individuals.
3. Numbers that make no sense whatsoever.
We picture the IRS as a group of crotchety old men and women who are looking at everything with a microscope trying to “catch” us. As funny as this visual is, it’s not reality. All tax returns are first put through a computer system with an algorithm that picks up on suspicious looking entries.
Does it make sense that a family of five with mortgage interest and real estate taxes totaling $28k survive on an income of $50k, or even $60k? Nope – it gets flagged. Once picked up by the IRS’s supercomputer it lands on a revenue agent’s desk. He or she will now be starring in your nightmares Let the audit begin!
4. Huge subcontractor expenses with no payroll
Paying your workers as subcontractors is great – if they are in fact true subcontractors. Here’s how to tell the difference:
Subcontractors often own their own business, have their own insurance, provide invoices for their work and are providing a service for multiple people and companies – not just you.
Employees give you their full attention, require a consistent paycheck and don’t have business insurance.
Having employees comes with extra hassle and cost so we completely understand the appeal of subcontracting out all of your work. However, this puts the worker at risk and can cause back tax problem for them too! If they are not planning properly, they will owe big at year end because taxes aren’t taken out of their pay each week.
In order to protect the workforce, the IRS enforces all relevant laws and rules. In this case the biggest, ugliest penalties and interest come from payroll tax problems.
5. S-Corporations with a profit but nothing for officer compensation… double the risk if you don’t have payroll at all.
There are many tax benefits of setting your business up as an S-Corporation. Just remember, you are creating a company separate from yourself which makes you an employee of that company even as the owner. If the company is profitable, than it’s not possible to have zero people working for the company. If you have an S-Corp and no officer compensation – it looks pretty suspicious. But, you double your risk if there is no payroll set up at all. At that point you’re pretty much going 150 mph on the tax highway and you’re going to get caught.
What’s worse… failing to file at all. The Small Business Association says that on average 50% of businesses fail and a large portion due to financial hardship. Unfortunately, some business owners make the grave mistake of choose to keep all the money instead of paying taxes. The problem is, if you get caught, you will be facing hefty penalties, fines and back due taxes. If you were in financial trouble before chances are this will be enough to sink you permanently. And, it’s not just what’s in your bank account the IRS comes for, they will put liens on your property to repay what is theirs. There’s no upside or way to outsmart the IRS – so you might as well follow the rules and stay in a safe margin of the speed limit to stay off the radar.
Ready to schedule your meeting? Call us at 603-432-8291 or make an appointment right online at http://tslnh.com/schedule-an-appointment/.
