Q: With tax season at hand, is it possible to make sure we are not audited by the Internal Revenue Service?
-J.S., Diamond Bar
A: While most taxpayers are not audited, research indicates there are “red flags” to avoid. For example:
- If you run a business and file Schedule C, the IRS anticipates you are seeking to make a profit. If instead you claim losses every year, and no profit, that may raise a red flag;
- If you do not report 1099 income, or under report it, a mismatch may be problematic;
- If you take early withdrawals from a retirement account (which means prior to age 59.5), a 10% penalty can come into play. Income tax also is owed on the amount withdrawn, unless you qualify for an exception;
- If you have excessive business expense deductions, which can range from too many business meals to questionable travel costs to a high volume of entertainment expenses. Red flags may also arise if you have too many deductions compared to your income, and given the type of business you operate;
- If you overstate charitable deductions;
- If you have a hobby that generates money — maybe winemaking or breeding horses — the income you derive from it must be reported. You can only deduct losses if you operate the hobby like a business (which means you have a reasonable expectation of making a profit); and
- You gamblers, be wary if you claim a big loss or fail to report winnings.
Bottom line, this column is no substitute for working carefully with a qualified tax professional and making sure you keep very good, credible records.
Taxpayer Bill of Rights
Did you know there is a taxpayer bill of rights? Here is the list, which you can read about online, including at irs.gov/taxpayer-bill-of-rights:
- The right to be informed;
- The right to quality service;
- The right to pay no more than the correct amount of tax;
- The right to challenge the IRS’s position and be heard;
- The right to appeal an IRS decision in an independent forum;
- The right to finality;
- The right to privacy;
- The right to confidentiality;
- The right to retain representation; and
- The right to a fair and just tax system.
Ron Sokol is a Manhattan Beach attorney with more than 35 years of experience. His column, which appears in print on Wednesdays, presents a summary of the law and should not be construed as legal advice. Email questions and comments to him at ronsesq@gmail.com.
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