4 Red Flags For An IRS Tax Audit (audit lottery) | The Economic Ninja

Hey, everybody, economic ninja here. I hope you’re doing great. We’re going to talk about four red flags for an IRS tax audit and how to avoid the audit lottery, according to Tax Pros. This is on CNBC. It’s important to go over this. I just went to a tax professional, tax and legal symposium about, I don’t know, about a month and a half, two months ago and it was interesting.

Just the fact of the matter is most tax professionals do not do, they do continuing education, but they don’t go show up in person. They don’t really make it a point to learn new skills. And the tax code is changing constantly and it’s really important. Hey, look at that. It just started to snow. Isn’t that cool? Wait, hold on. Sorry. So beautiful. Total tangent, but I mean, just the fact that not every single snowflake is created equal.

Just think about that. Let me shut my car door. It’s just like us. Back to taxes. Sorry, I digress. One of the facts that I learned at this tax symposium was that just having an LLC knocks out like something like 90% of the tax audit risks just having an entity of some sort. Because the IRS leaves it alone. They go, look, they’re already on the right path. We’re going to go after all those dbas.

And so if you have a business and you don’t have an entity of some sort, look into it. It doesn’t bring you necessarily different, better write offs. There are a couple of write offs that you can do in an entity that you couldn’t do if you were a sole proprietorship. But the audit risk is so much less so. Again, not financial advice or tax advice or legal advice.

I go and get legal advice and I suggest everyone else does it. But let’s dive into this story. It says as Americans are filing returns this season, some worry about IRS audits amid agency efforts to ramp up service, technology and enforcement. Recent IRS enforcement has targeted high income individuals, large corporations and complex partnerships. But everyday filers could still face an audit, and certain issues are more prone to IRS scrutiny, experts say.

You don’t want to face the audit lottery, warned Ryan Lowsey, a certified public accountant and executive vice president of CPA firm Pizicic. Real quick, too. The side hustle course. This is the last nine days. We’re going to be offering it for now for $199. If you want to get in, there is an entire section on how to set up a I go from starting a garage sale to starting an LLC and I have an amazing professional in the field helping me teach some of those lessons in that.

And it’s very important that you look into getting that LLC set up the right way. Now, it says audit rates of individual income tax returns decrease for all income levels from tax years 2010 to 2019, largely due to lower IRS funding, according to a report from the Government Accountability Office. But just recently, our current president has upped their funding, and they’ve hired tens of thousands of agents. That means that those audits are going to go up.

All right, please understand that. Type one, if you agree with me that most people think that these IRS agents, there are people out there that really think the narrative. Oh, those IRS agents, the tens of thousands that were getting hired, those are for just the rich. No, you see, tax was set up in the beginning. The income tax was set up for the rich, and then all they did was change the definition of rich to where now you’re rich even though you don’t feel rich.

Type two. If you don’t feel rich, but you understand that the government thinks you’re rich and they want to come after your money. It’s true. And so the best way to avoid taxes legally, to pay less tax legally, is to start your own business, start a side hustle. It’s so important. This is what I go through in the course. It’s so valuable to have some type of side hustle.

As a matter of fact, most people don’t know this, that 50% of Americans are actually receiving a 1099 this year in some form or another. Now, I get it’s the gig economy, and most people don’t look at that as a side hustle, right. Because most people are doing Uber or Lyft or DoorDash as their full time gig. Right. But it is a side hustle. It is your own business.

And a lot of people, every time I’m in an Uber or a lyft, I’m asking them how they’re writing off their vehicles. What do they think of the rates? Now, a lot of them do not treat their side hustle as a business. They aren’t tapping into home office deductions. They aren’t tapping into everyday expenses that they would spend normally. But they’re now spending as a business expense. They’re not writing it off.

And it’s really sad, especially when states like California want to destroy it. So let’s go over these four big red flags. Missing income for taxpayers. Missing income is easy for the IRS to catch because of so called information returns, which are tax forms that employers and financial institutions need to send to the agency, they talk about 1099 B’s and 1099 necs. Let me give you an example. I was dealing with a friend of mine in a business transaction, and he said, okay, I’m going to send you a check.

And I said, well, I haven’t filled out any tax info for you or giving you my tax info. That’s okay. We don’t need it. I’m like, well, okay, first off, you do need it because you have me fill out a document that fills out my company name, my address, and then I sign it to be true and legit. Because what you’re going to do is, I get it.

You’re covering yourself. You’re covering yourself, right? And you’re going, I’m going to send in that, I sent you $10,000 and I’m going to show the IRS that. Right? Well, I always want to cover myself because I want the information to be true and factual. And he’s going to want to be able to show that to the IRS, because if the IRS ever audits him and goes, hey, you sent money to this person, this person, this person.

And it’s weird that none of them are claiming it as income. See, it works both ways in this scenario. They’re talking about how if you don’t claim it with the government, that you got a $10,000 check from a company, but the company sends in that document, you’re in trouble. But it can also be on the flip side, they don’t talk about that. All right, so I look at everything through the lens of not only a consumer or an employee, but I also look at it through the lens of a business owner or an entrepreneur.

Okay, so that’s very important. So missing income, that’s very important. Number two is unreasonable tax breaks. Another red flag could be excessive deductions compared to what’s considered normal for your level, your income level. According to Losi, for example, if your adjusted gross income is around 10,000, but you’re claiming itemized deductions, such as charitable deductions, similar to million dollar filers, that could raise eyebrows. Let me throw this out there.

I don’t remember the number off top of my head. I want to say it’s 50% of your adjusted basis. I’m blanking out. But I have thrown off 14 red flags once and everything. I wasn’t worried about an audit, even if I got audited, because I had the receipts for everything. And one of them was charitable deductions. And it said that you are giving more than people that make more.

And I go, I’m just giving a flat percentage. So I don’t know whatever the heck they’re doing, but I know it falls within the realm of legal for me. So it was not more than 50. I don’t want to get into numbers. My point is this. I had the receipts, right? So I was okay. Another thing, too, is when you’re running all of your side hustle through your personal finances, it’s called a DBA, doing business as or a sole proprietorship.

Right. The IRS, let’s say you go right off a vehicle. The IRS gets to look at everything all once they look down and they go, hi, you wrote off a vehicle. Good for you. But how many vehicles do you own, and how much of this is business? And they look at all, and it’s bad, it’s not good. It’s better if you have an LLC and the LLC writes off a vehicle expense and the LLC has an expense account and it has its legal write offs.

I’m talking about all stuff that’s legal. And they just look at the LLC and they go, oh, that’s great. Okay, we sign it off. This is how much you owe, and here you go. And then later, when you have that information, now, you go and file your personal tax return. It’s a totally different realm. So many less audits involved when you have your business set up in the proper entity.

Okay, now, number three, let’s talk about round numbers. Accuracy is critical when filing your tax return, and experts recommend using actual expenses rather than estimates for tax breaks. When claiming four or five digit deductions, it’s very unlikely your expenses will be round numbers. Can you imagine that? So think about that. When somebody’s just glancing over a tax return, it’s like, oh, yeah, $10,000 went to this and 12,000 went to that.

And they’re like, that doesn’t exist. Round numbers don’t exist. And they clue in and boom, computers are scanning all of these tax returns each year, and they’re picking up on this stuff and they’re tagging these things for audits. And then the IRS goes through and goes, okay, who are we going to audit and who are we not going to? That’s that lottery. That audit lottery. They’re talking about.

Number four, they’re talking about earned income tax credit. It says, the earned income tax credit, a tax break for low to moderate income workers, has historically been scrutinized because the refundable part attracts certain bad actors. It’s a complex credit with a high improper payment rate, national taxpayer advocate Erin Collins wrote in her legislative recommendations. While higher earners are more likely to face an audit, EITC claimants have a five and a half times higher audit rate than the rest of the US filers, partly because of improper payments, according to this policy center.

However, starting in fiscal 2024, the IRS said it would substantially reduce the number of correspondent audits or audits by mail for filers, claiming the earned income tax credit. Point being is this. It’s very important to stay out of an audit, but it’s also really important to get legal tax write offs. That is why wealthy people are wealthy. We spend more time talking to our tax people. As a matter of fact, it’s even hard to find tax professionals that are willing to meet with you monthly or quarterly.

Most people only see their tax person by the time it’s too late. You just give them all your information and they don’t get a chance to turn around and go, hey, did you think about doing this or that with your tax structure and you could save tons of money. Most people that are poor are poor because they don’t understand the concept of a penny saved is a penny earned.

Think about that. It’s very, very important. Look, if you want the side hustle course it goes through a full gamut of going from a garage sale to a corporation. There’s nothing like it on the Internet. And for the next nine days, it’s at $199. After that, the price is going up. If you want it. The links down below. I hope you have a great day. The economic ninja is out.

Bye. .

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