A couple large one-time deductions do not seem to trigger any automatic audits. I had a return where I claimed a tax rebate for rooftop solar panels and on the same return I also took the $7,500 electric vehicle rebate. This cancelled out about 60% of my entire income tax.
I was convinced I would be audited that year, but nope. They just mailed me a check.
It’s an easy way to cheat on your taxes … sure, the Ferrari was used 80% for business … uh huh … can’t imagine a machinist welding without sitting in the Ferrari …
But again, that’s the sort of thing that’s easy to check. Do you have an electric vehicle registered? Do you have a roof full of solar panels? I assume there’s no further requirements other than the receipts. The amounts are not out of line to what others claim for the same sort of reason.
But wouldn’t there have to be an audit in order to check this? I didn’t submit any receipts for the solar panels, just put the amount in the form.
Yeah, the car would be easy enough as the form asked for the VIN.
Not that I’m complaining. I’m happy not to have been audited!
I would guess that certain deductions are much less likely to trigger audits and electric panels may be less likely because of how cut and dried it is.
I worked for myself in Japan and there were certain things which were more likely to trigger audits.
Tapatalk posted before I was through.
Solar expenses would be expected to be large, but there would be other expenses which are unusual or fishy. Flying to. Vegas dying a convention in your industry is no problem. Taking only your mistress over Valentines would be something else.
I was in sales in Japan and there is a lot of entertaining which occurs there, but it’s context based. If you can show why it expenses were really needed then it was t a problem.
We always take the deductions we are allowed to do. Business use of the home, office in the home, etc., either with a Schedule C or K1’s from an LLC, and never got an audit for business or personal returns.
From the people I know personally who have been through IRS audits, they all told me they were no big deal. So this fear people live in because of getting an IRS audit is really kind of foolish. I think the people who are afraid of them most are the ones who know they are cheating on their taxes and/or not keep good records. Using Quicken, Quickbooks and Turbotax, the whole thing is pretty easy to do. People are causing way too much stress in their lives by cheating on their taxes. I do know people like that, and they are obsessed with claiming personal expenses as business expenses, for example, and it really is just stupid. Because if they would focus on other things that are really important they would be able to increase their business, personal income and net worth without the worry of an IRS audit or living under a cloud that they are doing something wrong all the time. They don’t see it is dragging them down. Just foolish.
Great advice … bookkeeping is an overhead and it’s twice as much work to keep two sets … and is it really worth what little is saved …
Does the IRS expect you to document personal and business use of an item in order to justify a claim of X% business use? In my case, 80% business is actually a pretty conservative estimate for much of the equipment I’ve bought, including listed equipment. The business use can be inferred from the amount of business I actually conduct and the money I earn (all well-documented), but the personal use is pretty much impossible to document. Would the IRS give me a hard time about this during an audit?
I think Fubaya’s point is that, if you’re reporting $200/wk income (and have the corresponding W-2s or other forms) then why would the IRS suspect that you’re getting $5,000 deposits in your checking account? And why would they flag you for an audit without knowing about the $5k deposits since they don’t have access to your accounts until you’re audited.
It’s like cops with a search warrant could find the body under my floorboards but, until they have reason to suspect I have a body, they wouldn’t be getting the warrant.
My advice would be to avoid taking the same rooftop solar panel deduction for several years in a row. Once is ordinary. Replacing goods with a decade-long life every year is not. That’s the difference that gets people in trouble.
My wife’s tax law professor had a saying he used in class often: “Don’t get piggish”. The bottom half of edwardcoast’s post is the key. Once somebody decides all tax is theft, then every dollar they pay is wrong and an affront. They’ll say or do or file anything, regardless of reality, to lower that bottom line figure another dollar.
Those pigs are the IRS’ auditors’ favorite food. And they stand out easily to tools like DIF mentioned by DrDeth. Us ordinary folks just taking our legit deductions plus a smidgen of optimistic “rounding” of both dollars and rules are not the target.
We took this credit last year and didn’t hear anything back, so we maybe got lucky.
Actually, we were doubly lucky because when I first met with my accountant, he said our AGI was too high to take the deduction, but after we took some losses from a small business I’m part owner of we were under the cut-off. Unfortunately, it escaped his attention (and mine) until after we had already filed.
So we had to do an amended return and it took an extra 4 months to get that damn check back!
But sometimes it can’t be helped. I had a job when I was young that involved a lot of travel ( I was a roadie ). The job itself was not very high-paying and taxes were withheld. We also got a per diem which was used for food and hotel expenses. It was more than the actually salary. But taxes were not withheld, we were expected to avoid tax liability by reporting out the expenses on our tax returns.
Needless to say, the fact that I was making less than 20K that year and reporting business expenses exceeding that number hit a bunch of red flags. So I was called in for an audit.
I still remember how exceedingly polite and professional they were.
When I hadn’t been seen at 5 minutes past my appointment time, the woman at the desk threw a fit about it and an auditor came out for me 2 minutes later and took me into her office. I simply explained the situation ( plus I gave her the note from my employer) and showed her my my expense diary ( which looked exactly like the work of a 23 year old roadie, it was not very professional). But she took it, ran numbers from a few pages and told me she was satisfied and that I didn’t owe anything.
She was pleasant and friendly and even made a joking comment about how this was too easy and now she had to do another audit today.
And actually, there was something to find and I was a little concerned that she would catch it. I had spent several weeks in Canada and all my cash receipts for that time reflected Canadian dollars and I did not convert to USD when I took the deduction. But she either missed or overlooked that.
It wasn’t the best day of my life but I learned not to fear the IRS that day.
Yes, they’d want a log of business miles driven.
One of the tricks that would get your banking records drawn into things - Revenue Canada (and I assume, the IRS) can do “lifestyle audits”. Basically if you don’t seem to be reporting enough income to support what is apparently your lifestyle, then they can impute your income and assess tax based on that. So if you claim you only make $200 a week, why can you drive a Mercedes and own $300,000 house? How do you pay the mortgage? How did you pay for the car? “We estimate that for normal lifestyle, plus these assets, you must be going through $130,000 a year”
Even if the differences are not that blatant, if they do the math - after house and car payments, where’s the money left over for groceries and gas? They can simply impute that you are hiding income, and it’s up to you to challenge that by showing they are wrong, and showing where the money came from.
I assume if the numbers don’t make sense while they are doing an audit, that would be grounds to subpoena you bank records.
Yes, 'source and app" or “cash T”. Usually it when someone rats them out, often a ex-wife etc. Or when arrested for drugs, etc, but tax return shows bupkis. Al Capone…
The car isn’t difficult; I keep receipts and shipment records to account for visits to stores and USPS/UPS.
But what about something like a saw, or a welder? if I claim that’s it’s 80% used for business, and I get audited, what would the IRS expect me to provide in order to document/prove my claim?
Those are not listed property. The assumption is that work tools are bought for a used for work, the occasional personal use is waived.
IRS Code Section 280F(d)(4)(A) defines listed property as:
Passenger automobiles,
Any other transportation property,
Property of a type generally used for entertainment, recreation or amusement purposes, but not used exclusively at a regular place of business,
Any computer or peripheral equipment not used exclusively at a regular place of business and owned or leased by the person operating the business and
Any cellular telephone or other similar telecommunications equipment. ( several bills has been introduced in Congress to remove cell phones from being included as listed property.)
In middle school (a century or so ago), a teacher told about one of her colleagues from a previous job. He had been bragging about how low is taxes were. Low enough to really surprise my teacher because they were making roughly the same.
That teacher had claimed a home office and had deducted a forth of his apartment for years. Then was audited and suddenly owed a hell of a lot of money.
I went along with a friend to a seminar on how to lower taxes. We left before it was halfway through, as it should should have been titled “How to Guaranty an IRS Audit”
with such gems as “always set up your own company so you can write off household expenses.” “How to write off your Hawaiian vacation.”
No doubt the people sold a lot of books, then skipped town before getting busted.
One way, apparently, to get audited is to stop using your accountant and start doing your taxes yourself. This happened to a friend. He rather suspects that the accountant reported him. Fortunately, he is meticulous about records and had everything on his computer so when HMRC came calling he just printed everything off and said, “There you go.” and they haven’t bothered him since.