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The IRS is Looking for These Audit Red Flags this Tax Season

Filing taxes can be complicated, but a simple mistake or a slight exaggeration could warrant an audit from the Internal Revenue Service.

Here’s how someone is chosen for an audit: An IRS software program may randomly select the taxpayer and compare the return to other similar returns to detect any anomalies, or the taxpayer in question may be linked to a family member or business partner who is being audited.

The IRS can audit returns up to three years old. Inaccuracies could lead to penalty charges: 20% of the disallowed amount for filing an “erroneous claim for a refund or credit,” the IRS stated, or $5,000 if the tax return was deemed “frivolous,” where there isn’t enough information to assess correct or incorrect information.

In more serious cases, taxpayers could also be brought to trial and face criminal charges of tax evasion or fraud.

And now for the good news: The IRS audited less than 1% of returns in 2017, and that number was expected to be lower last year, said Joy Taylor, a tax expert at personal finance site Kiplinger. (The most recent IRS data is from 2017). Does that mean you should be carefree about filing? Absolutely not. Here are red flags tax experts say you should avoid:

Turning into the most generous person in America

One of the most common reasons for an audit is when the taxpayer is taking higher-than-average deductions in relation to his income. This can come from various types of deductions: Charitable contributions, real estate interest or student loans interest.

The IRS has a sense of what’s a fair amount of deductions based on income brackets, Taylor said, and if someone blows past that threshold, it could lead to an audit. If someone earned $120,000 and claimed $50,000 of charitable contributions, they’d smell a rat.

If you are that generous, have the proof ready in case of an audit. Many legitimate charities give receipts to donors, so keep them safely stored.

IRS: Don’t Be Victim to a ‘Ghost’ Tax Return Preparer

 

Today, towards the end of the second full week of the 2019 tax filing season, the Internal Revenue Service warned taxpayers to avoid unethical tax return preparers, known as ghost preparers.

By law, anyone who is paid to prepare or assist in preparing federal tax returns must have a valid 2019 Preparer Tax Identification Number, or PTIN. Paid preparers must sign the return and include their PTIN.

But ‘ghost’ preparers do not sign the return. Instead, they print the return and tell the taxpayer to sign and mail it to the IRS. Or, for e-filed returns, they prepare but refuse to digitally sign it as the paid preparer.  

Partnership or Limited Liability Company (LLC) Agreements 

You should be aware of and review your agreements with your attorney to ensure it addresses the significant changes to the partnership audit regime that will generally apply to partnership/LLC tax returns filed for the 2018 tax year and later years. These changes include, but are not limited to the following:

  • Replacement of a “tax matters partner” with a “partnership representative”,
  • Current partners being held responsible for tax liabilities of prior partners,
  • The partnership being held responsible for remittance of additional tax rather than individual partners being taxed,
  • Numerous elections or opt-outs that the “partnership representative” may make.

10 Things You Can't Deduct From Your Taxes Anymore

A new tax landscape

The Tax Cuts and Jobs Act of 2017 drastically changed the United States' tax code. This new law will affect every income tax return filed from 2018 to 2025 (when the individual provisions of the Act are scheduled to expire).

Scroll down 10 items that you can no longer deduct from your taxes. All but one of them will start to apply once you file a 1040 in 2019.

1. Personal exemptions

You can no longer claim a deduction for yourself, your spouse or any of your dependents. Each personal exemption in 2017 provided a $4,050 tax deduction. For example, a family of four could deduct a total of $16,200 in addition to a standard deduction, itemized deductions and any adjustments to income. The loss of this deduction greatly minimizes the tax benefit of the increased standard deduction. To make up for the loss of this deduction, the child tax credit for qualifying children under the age of 17 has been increased by $1,000 and made available to more taxpayers. Additionally, there is a new $500 credit for all other dependents, though there is no credit for the taxpayer and spouse.

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