The proof you need: Keep all receipts, and record the dates and times, description of the expense, the business purpose and business relationship. To see more instances, read this publication from the IRS. Or deducting half the cost of a concert ticket you bought from a scalper who charged you $150 more than face value. Not OK:Deducting the cost of a lavish steak dinner with rare champagne as entertainment, and then trying to deduct it again as a travel expense. Perfectly OK: Deducting 50% of the cost of a reasonably priced meal where you entertained potential clients for your business while discussing business. Rules for claiming this are strict, so it’s a smart idea to read up on them before trying to make the government pay for your nights out on the town.
The proof you need: Get your large donation appraised, file Form 8283 for any donation over $500, and make sure you keep all charity receipts and follow the IRS’s tips for charitable donations. (“That 1995 Camry I gave to charity is worth at least $15,000!”) Not OK: You’re getting creative with your charitable deductions. Perfectly OK: You gave a generous donation to your alma mater … and then suddenly lost your job, making your income lower than expected. The IRS will raise its eyebrows if you’re giving away large charitable donations when you don’t have much income. The proof you need: Keep all records pertaining to the purchase of your home.
You’ll need to pay back the credit in full when you pay your taxes that year. Not OK:You bought your first home … and then promptly resold it within three years for a profit, or made another home your primary residence. Perfectly OK: You bought your first home, and you’ll be living in it for at least three years. For that reason, they will be checking to see if you stayed in the home for at least 36 months (three years), as required. However, this credit has been used and abused by those trying to defraud the IRS, so they will scrutinize anyone who claimed this credit in order to exclude people who are flipping homes or speculating in real estate. Those who claimed it in 20 (and 2011 for service members) do not have to pay it back unless they move out of the home in the first three years after the purchase. Therefore, they must pay back the loan over 15 years by paying an additional tax.
People who claimed the credit in 2008 treat it like an interest free loan of up to $7,500. If you bought a home for the first time after Apand before January 1, 2010, then you could have gotten the first-time home buyer credit. If you think it is wrong, inform the company and ask that they file a corrected W-2 or 1099 with the IRS. The proof you need: Compare the W-2 or 1099 you receive from the company against your own records. Not OK: Estimating or fudging how much you’ve made, even if you’re a freelancer. You can’t lie about your taxable income, because both you and the IRS received your W- forms, for both full-time employees and self-employed individuals.
We’ve listed the top audit triggers for you, how to know if you’re in the wrong and what proof you’ll need to ward off a full-blown audit, fines and frustration: 1. In the latter case, you can appeal or enter into a mediation with the IRS. The IRS proposes a change, and while you understand it, you don’t agree.The IRS proposes a change and you agree to it and/or pay more taxes, interest or a penalty (and in extremely rare, severe cases, forfeiture of property and jail time).The IRS decides all is well and the return stays the same.The audit can be conducted either by mail or in person, and there are three possible outcomes: The IRS will then agree with you and leave your return the same, and the audit will be over without any fines or any worries about tax evasion. That doesn’t necessarily mean you’ve done something wrong, just that the return you filed has something that might signify you’re trying to defraud the IRS.īut if you did everything correctly on your return, you should be able to prove that you are paying all of your taxes.
In order to quickly process millions of tax returns, the IRS has certain things that will automatically trigger an audit.
Editor’s Note: We’ve tapped a personal finance pro at LearnVest to contribute, bringing their unique style, expertise and insight.