Avoiding the Dirty Dozen Audit Red Flags

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Avoiding the Dirty Dozen Audit Red Flags

Feb 10, 2013 Posted by Sanjiv No Comments

The taxpayers are warned on manipulating any information related to the filing of their tax return deductions. This can let loose the ever inquisitive nature of the IRS and you can invite trouble upon yourself, which is best avoided at any cost. There are many factors that may flag your return for an audit and you should always consult with your tax professional to ensure that your return is in compliance with all applicable laws. In this article, I am going to point out twelve indicators / warning signals which in case exceed from what is believed to be normal, can trigger an inquiry from the IRS. The twelve ‘Red Flags” as they are addressed, are listed below.

  1. Filing higher income.
  2. Failing to report all taxable income as stated by the duplicate records available to the IRS.
  3. Filing for large charitable deduction, disproportionate to your known income.
  4. Filing for home office deduction.
  5. Filing for deduction on real estate rental losses.
  6. Filing for deduction on travel, business meals & entertainment.
  7. Filing the deduction for full (100 %) use of a vehicle.
  8. Filing the deduction on the losses related to a hobby activity.
  9. Filing a deduction for running a business on cash.
  10. Failing to report the account you hold in a foreign bank.
  11. You engage in transactions involving currency.
  12. Filing for deductions which exceed the average.

Availing of deductions sufficing the dictates of being reasonable can actually help you avoid unnecessary hassles, which would emanate out of a situation like facing the IRS audit. A part of the mentioned “hot spots” are clear manifestations of a planned deceit; the rest can be majorly attributed to ignorance on the taxpayer’s part on filing deductions. An experienced tax expert can help you remain on desired procedures along with putting up an effective representation for you in case required.

Handling the IRS audit on your own is not advisable: you wouldn’t have the expertise and skill required in handling the excruciatingly long & intimidating interrogation by the examiner. Rather the nervousness ensuing from the process holds the potential of you spilling off the restricted information to the auditor. This would worsen the matter further for you.

The bill raised by the examiner would be proportional to the information you give, as he digs for more.

Taxpayer has the legal right to representation. You can contact a seasoned tax expert to represent you at the IRS audits and aid you in resolving your tax issues forever. 

Avoiding IRS Tax Audit This Year

Jan 15, 2013 Posted by Sanjiv No Comments

There are many things that seem to raise the red flag every time a tax return goes to the IRS. This article is going to point out some of the reasons behind an IRS audit. These points tend to increase the probability that you are going to get an audit from the IRS at one point in your life.

The first thing that should always put you on the look out is if you make a lot of money. Generally, people who earn a lot of money tend to underpay their taxes. The problem is that while people make money, they tend to spend it on many different things and forget that they are required to declare all sources of income and pay the taxes that arise from such incomes. This means that there is always the risk that such a person is underpaying his taxes or not paying some of them at all. This is a matter of concern for IRS.

There is also the risk that such a person fails to report all of the taxable income from 1099’s or W-2’s reported to the IRS. This failure may be intentional or just out of ignorance.

Another factor to look into is the charitable deductions that you make or receive. Giving back to charity and accepting charitable donations is one of the ways in which many people keep off paying taxes. However, there are some deductions that are tax exempt while others are taxable. There are many other types of deductions that you should also look out for the home office deductions that are claimable the rental losses that you make, business meals and travels as well as entertainment expenses.

One of the common mistakes that many people make is to write off the losses that have been acquired from a hobby activity among the business losses. In some cases, business persons who use their vehicles for business activities tend to claim 100% of the use of the vehicle on the business. Some of these things almost always tend to raise red flags all over the IRS servers.

Other things that may raise the IRS red flags include running a cash only business, failure to report the foreign bank accounts that individual holds and trade in currencies. Even then, whatever the reasons that you may have, it is important to avoid IRS audits. Overstating deductions and profits in most cases also attracts the IRS to your doorstep.

This is why it is important to use professionals in this field to cover the loopholes that you may have had. Professionals will also help you better organize your financial returns and reduce the possibility of raising the red flag at the IRS.

What Are The Available Medical Deduction Plans?

Jun 22, 2012 Posted by Dolly No Comments

A medical deduction plan helps to reduce tax on medical expenses.  This type of plan is beneficial for one who has to spend excessively for medical issues.   Medical deduction plans allow a person to qualify for tax exemptions. However to file tax return on medical expenses it is essential for an individual to present all supporting medical documents.

Tax Deductable Expenses

Tax deduction for medical expenses is available for a large number of issues. One can get deduction on diagnosis cost, cost of treatments and even cost of medical supplies.

 Medical deduction plans are available for the following issues generally.

  •  Fees payable to doctors and dentists
  • Expenses that one has to pay for medicines that are prescribed by a doctor.
  • For medical aids and equipments like pacemakers, wheel chairs, hearing aids and dental equipments.
  • Charges of weight loss program which is prescribed by a doctor.  However, the charges of low calorie foods can not be tax-deductable.
  • Travel expenses due to medical treatment.
  •  The cost of any type of surgery including eye surgery and cosmetic surgery.

However one point to remember is that medical expenses that improve general health such as vitamin deficiency are not tax-deductable.

Who can have the benefits of tax deduction?

  • A tax payer can deduct medical expenses for his/her own medical treatment, cost of equipments and surgery.
  • A tax payer can receive tax deduction for the treatment of spouse.
  • A tax payer can claim tax deduction for medical issues of a person who is dependant on him/her.

  Is there any exposure for non dependant?

IRS generally offers no tax deduction offers for the non dependants. However, in some special cases tax deduction rules can be changed.

  • IRS does not offer any coverage for a non dependant even if it is one’s own child. But if the child is a non-dependable according to the law of divorce or separation.
  •  A tax payer can not claim a person as dependant if he/she gets $3,700 and more.

 

How to apply for tax deduction?

 

A tax payer can claim deduction of medical and dental expenses if the services were made during the tax year.  An applicant can apply for tax deduction when the payment is complete. This is applicable for each type of payment, such as online payment, payment by phone or credit card.

Deduction plans for long term medical expenses

IRS offers tax deduction for long term medical expenses.  If a person suffers long time from a severe medical issue, he / she can claim tax deduction for diagnostic, therapeutic, treatment and personal care cost. In order to avail a long tern medical deduction, one must meet all criterions as specified by IRS.

  • Medical issues must be of chronic type:  a person can be diagnosed as chronic sufferer if he /she has been suffering for one year or more and is unable to perform daily activities without substantial co operation.  if the mentioned person requires extensive care to maintain personal care and
  • Diagnosis, treatment and all other necessary medical services should be executed under the supervision of a recognized doctor or medical practitioner.

 What should be included in long term medical deduction plans?

Tax deduction can also be granted for the following issues.

  •  Expenses of meals that a person takes at a hospital or nursing home. However, such meals must be part of medical care.
  •  Charges paid for medical conference including transportation and admission costs. The time of conference must involve medical sessions. A person is not capable to claim tax deduction for fooding and lodging charges that he/she has to pay during the medical conference.
  •  IRS offers tax deduction for medicines, injections and other medical supplies those are prescribed by a certified medical practitioner. For diabetes patient, the charge of insulin is deductable without prescription.
  •  A chronic patient some times requires additional nursing services to perform regular activities. In such case, cost to appoint a nurse or an attendant or a care-giver is deductable.
  •  Cost of operation, eye surgery can be tax deductable. On the other hand IRS does deduct amounts that are spent due to unnecessary surgical treatments such as some kind of cosmetic surgery, artificial implantation etc.

IRS offers tax deduction for certain issues. These are mentioned in the following points.

  • Stop smoking program
  • Psychoanalysis
  • Sterilization
  • Pregnancy test kits
  • Special education
  • Weight loss program

Issues that are not tax deductable

  • Childcare services for a healthy baby
  • Cosmetic Surgery except for a medical requirement.
  • Weight loss program that is only for general health and appearance improvement.
  • Household service
  • Electrolysis
  • Expenses for funeral
  • Hair Transplant
  • Illegal surgical treatments
  • Cost of insurance Premiums
  • Imported drugs and medicines
  • Nutritional Supplements
  • Fees for Veterinary treatment
  • Diaper Service

 

 

 

 

 

 

 

 

Tax Deductions for Independent Contractor or 1099

May 13, 2012 Posted by Sanjiv No Comments

Starting out a consulting business can be very lucrative. However, it can also result in heavy tax bill you do not organize your income and expense properly.   So, how do you organize your income and expenses?

You can start by opening a different bank account.  Do not mix your business bank account with your personal bank account. All business related income should come to this account and all expenses should be paid from this account.   Your client will send you form 1099-misc at the end of the year.  IRS will also reactive a copy of this 1099.  That being said your total business income should be greater or equal to the amount listed in 1099.  You may get an automated customer generated audit if you report total income less than the amount listed on your 1099.  Keeping a separate bank account will help in calculating total business income and you act as proof in case of audit.

Now you need to deal with your business expenses.   Easiest way to do this is to categories your business expenses.   We recommend you use same or similar categories listed on schedule C.  This will help during tax time.  Now, every time you pay a bill, you simply need to enter that transaction in the correct category.  You can use a simple spread sheet, financial software or you can use shoe-box.  Most CPA firms also provide bookkeeping services. For example, you can simply send us your bank statement at the end of the month and we can do the complete bookkeeping. We will assign each expense into an appropriate categories based upon its tax implication.

What are some of the most popular business expense categories ?

  • Advertising – All expenses paid for online marketing or print marketing including business cards or flyers.
  • Consultation Fees – Fee paid to professionals like attorney, CPA, or marketing professionals.
  • Insurance Cost –  Business Insurance Expenses including life, property & casualty, or business insurance
  • Interest Cost – Interest cost of your business loans. You can include fees and other related cost.
  • Office expense – Any supply or equipment you purchase for your business operation.
  • Rent or lease other business property – Cost of operating your business office.
  • Repairs and maintenance – Include all cost related to your business only.
  • Travel – the cost of traveling to a business related event like convention, meeting, or business trip
  • Meals and entertainment – You can include meals and entertainment expenses related to your business.
  • Utilities –electricity, gas, telephone, internet
  • Other expenses – such as Dues & Subscriptions, Web development, and Business telephone expenses.

 

Health Insurance expenses:  Premiums paid for your health insurance are tax deductible.   You can deduct the full cost of health insurance premiums on form 1040 but you must have an Income from you business.   You can deduct the health insurance cost event if you run into losses but it has to be reported different.  Consult with your CPA to ensure you are reporting the deduction properly.

Still have a question about your business expense?  Leave us a comment or call our office at 510-825-7563