Is there a way to avoid an IRS tax audit? Ask the lawyer

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 Income tax also is owed on the amount withdrawn, unless you qualify for an exception;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:

1. The right to be informed;
2. The right to quality service;
3. The right to pay no more than the correct amount of tax;
4. The right to challenge the IRS’s position and be heard;
5. The right to appeal an IRS decision in an independent forum;
6. The right to finality;
7. The right to privacy;
8. The right to confidentiality;
9. The right to retain representation; and
10. 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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