LOUISVILLE, Ky. (WDRB) -- Financial expert Mark Lamkin explains some mistakes the could move your tax return to the top of the list for an audit.
Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored?
The IRS audits only slightly more than 1% of all individual tax returns annually. Financial expert Mark Lamkin from Lamkin Wealth Management says the odds are pretty low that your return will be picked for review. But there are some mistakes the could move your tax return to the top of the list for an audit.
The biggest reason people receive letters from the IRS is addition or subtraction goofs. Fortunately, math errors rarely lead to a full audit. Still, double-check your math before you send in your return. I am also including dividend and interest miscalculations here. Banks and Brokerage firms report this information and if you report this information wrong on your returns, it will be kicked out and flagged immediately!
And if you receive a letter from the IRS saying you owe money, check your numbers first. Sometimes, an IRS employee misreads one of your numbers, or the number is keyed into the IRS computer system incorrectly. If the agency is wrong, send a letter with a printout of your calculations.
Never brag about how you put one over on the IRS, especially on Facebook. The IRS has been successfully trolling such sites to find unreported income and tax cheats.
Internal Revenue Service whistle-blowers can earn rewards of 15% to 30% of the additional tax collected, including fines, penalties and interest. Scofflaws can be reported by filing Form 211 or calling the IRS fraud hotline at 1-800-829-0433.
Everyone else: Zip it. Keep your accounting strategies to yourself.
The IRS knows what to expect for deductions based on your income. Take a deduction that the IRS feels is too high for your income, you may risk an IRS inquiry.
Charitable contributions receives particular scrutiny. All cash donations require receipts for documentation.
The rules for non-cash contributions have become even more stringent. For non-cash donations you have to document how you determined the value of the item you are donating. You can no longer claim a $20 deduction for the old shirt you gave to charity just because you may think it is worth that much. You may have to determine and claim its thrift shop value instead. Some valuable items may require an appraisal to clearly determine their value. For all non-cash donations over $500, you must also file a Form 8283.
If you run a business out of your home you may qualify for a home office deduction. A home office will allow you to deduct a percentage of your rent or mortgage interest, utilities, insurance, and real estate taxes from your business income.
To qualify for the home office deduction, you have to use an area of your home exclusively for business. Your family can't watch t.v. in the room in the evening and your children can't use your office computer to do their homework.
For many, what they do for business is something they enjoy doing. Enjoy photography, go into business as a photographer and get to deduct the cost of your camera and your expenses. Sell a picture or two and your home free. Sounds like a great plan. Maybe not so fast.
The IRS allows you to deduct expenses for a legitimate business, but not for a hobby. If you claim a hobby with a lot of expenses and large losses, such as car racing, as a business, you run the risk of an audit.
You must report any income you earn from a hobby, such as the sale of a few pictures if you are a photographer. But, you can only deduct your expenses to the extent of the income you generated from the hobby. You cannot deduct losses.
To be a business, the activity must have an expectation of making a profit and it must generate a profit at least 3 out of every 5 years.
1. Report all of your income.
2. If you can prove you are entitled to legitimate deductions, take them.
3. Keep good documentation to justify your deductions.
4. Save your receipts to verify your expenses.
5. Don't take deductions or claim credits you are not entitled to.
Lamkin Wealth Management
5151 Jefferson Blvd., Suite 102
901 Lily Creek Drive Ste. 102
office: 502-961-6550 Office
toll free: 866-961-6550
"Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and an Investment Advisor"
Don't be afraid of Red Flags:
5. Claiming a Hobby as a Business
4. Claiming a Home Office
3. Taking Larger than Average Deductions
2. You have a big mouth
1. Math mistakes