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Want to get audited by the IRS? Here’s how.

Recently, The Kiplinger Tax Letter published on its website “15 Audit Red Flags.” I set them out below – some verbatim and some paraphrased. The snarky comments are mine.

  1. Making a lot of money. If your income is $200,000 or more, you must be doing something bad: you are three times as likely to be audited by the IRS as people making less than $200,000.
  2. Not reporting what is on information returns sent to the IRS. The IRS is pretty darn good at tracing information returns like W-2s and 1099s to tax returns.
  3. Claiming high itemized deductions. If you really paid them, deduct them. However, be ready to show proof to the IRS.
  4. Having a Schedule C for a business that shows a loss. IRS: Gold mine!
  5. Reporting large charitable deductions. Be ready to produce your cancelled checks (who has them anymore?) or credit card statements and the acknowledgements from the charitable organizations. Big property contributions? Be sure to follow all the IRS rules about appraisals and Form 8283 reporting; there is no room for error.
  6. Claiming rental losses. Net rental losses can only be claimed by an individual above a certain income level who qualifies as a real estate professional. Are you a part-time landlord? Chances are you can’t deduct your net rental losses. Passive income from other sources (known as “PIGs” to us tax nerds) to offset the rental losses would help.
  7. Taking an alimony deduction. You must obey very precise rules to deduct alimony. The IRS knows this. Wise family law attorney Mrs. Maultsby knows this. The IRS surmises that you may not.
  8. Writing off a loss for a hobby activity. There’s no form that says “here is a nondeductible hobby loss.” The IRS looks for some other indicators. See item 4 above. Have a Schedule F (reporting farm income or loss) showing a negative number at the bottom of the form.
  9. Deducting big business meals, travel and entertainment deductions. If you incur more entertainment expenses than the average IRS agent, you are suspect.
  10. Failing to report a foreign bank account. Dumb, dumb, dumb. The IRS has information exchange arrangements with a number of countries and gets the information directly from many foreign financial institutions, too. The penalties for not reporting can be more than the money in the account.
  11. Claiming 100% business use of a vehicle. OK, if the vehicle is a front-end loader or backhoe. Otherwise, the IRS (pretty much rightfully so) does not believe that a vehicle is ever used 100% for business. Pick up the kids from school occasionally? Loan your vehicle to your spouse, when said spouse’s vehicle is in the shop. Go a block or two out of your way to pick up your spouse’s dry cleaning? Get my point?
  12. Showing Day-Trading Losses on Schedule C. Day traders generally get better tax treatment than investors who trade frequently.   I’ve day-traded or traded frequently some in the past. Spent a lot of time and money to set up my trading. Traded a lot. I never reached the level of activity necessary to convince the IRS (and the courts) that I should be entitled to day trader status. Maybe if you traded all day and every day that the market is open, you have a shot at day trader status.
  13. Gambling. You have better chances drawing to an inside straight than you have successfully claiming losses as a professional gambler. Win big and don’t report your winnings? See item 2 above.
  14. Claiming a home office deduction. Generally, you must use the space exclusively and regularly as your principal place of business. Notice all the limiting modifiers in the previous sentence? Also, you get the deduction by filling out a schedule for “business use of home.” Might as well wear a sign that says “kick me”!
  15. Cash. Big deposits and withdrawals of cash attract the IRS’ attention. So do big purchases for cash. How does the IRS find out? A number of businesses and financial institutions must report suspicious activities.

VKM

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HAPPY 80TH BIRTHDAY, SOCIAL SECURITY!

On August 14, 1935, President Franklin D. Roosevelt signed into law the Social Security Act. Today, Social Security provides benefits to about one in five U.S. residents, including retirees, people with disabilities, young children whose parents are deceased or disabled, widow(er)s and spouses.

Without changes in Social Security, the system is projected to run out of reserves in 2034. Then the system will fund about 75 percent of projected benefits on a pay-as-you-go basis. Disability coverage reserves may run out as soon as next year.

Why are changes necessary? Because we are living longer – a lot longer.

When Social Security was first enacted, the “full-benefit retirement age” was 65 years of age. In 1935, the average life expectancy was about 60 years. Currently, the full-benefit retirement age for persons born between 1943 and 1954 is 66 years of age. Today, a 66-year-old person is expected to live, on average, to about 84 years of age. So, there are a lot of people being paid Social Security for a lot longer, with a much smaller numbers of workers (contributors) per beneficiary (withdrawer) than there were in the past.

There are a number of “tweaks” that could be made to stave off a reduction in benefits. Revenue could be increased. One way that has been discussed is to increase or remove the cap on earnings subject to Social Security taxes ($118,500 in 2015). Benefits could be decreased. For example, the full-benefit retirement age could be delayed even further than is currently being phased in.

Most observers doubt that there will be drastic cuts in benefits and believe that Congress will fix the shortfalls. Social Security is too important to the social fabric of the nation.

There was a foretelling from the beginning about this problem of living too long for the system. Ida May Fuller was the first person to receive an old-age monthly benefit payment under the new Social Security system. She paid in $24.75 between 1937 and 1939 on an income of $2,484. Her first check dated January 31, 1940, was for $22.54. By the time she died on January 31, 1975 at the age of 100, she had collected nearly $23,000 in benefits. Let’s see, that’s over a 900 to one return on investment!

There will be no more “Aunt Ida” returns in the future for you or me or our descendants who make substantial contributions over our working lives. Hopefully, Social Security will at least provide a safety net for those needing it and give a decent return of (if not on) the money to us that we put into the system.

VKM

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IRS: Remain on High Alert for Tax Scammers

The IRS recently issued an announcement, IR-2015-99, warning taxpayers to be vigilant for tax scam artists. The Treasury Inspector General for Tax Administration is aware of more than 4,000 victims who have reported over $20 million of financial losses as a result of tax scams. The schemes continue virtually unabated and mutating like viruses.

To help you distinguish between real contacts by the IRS and contacts by scammers, the IRS sets forth six things that it would never do.

  • Angrily demand immediate payment over the phone.
  • Call about taxes owed without first having mailed you a bill.
  • Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  • Ask for credit or debit card numbers over the phone.

I’ll give you a couple of more signs of fraud, based on personal receipt of voice mails from scammers.

  • If the caller refers to the agency as the “Internal Revenue Services,” it’s a scam.
  • If the caller threatens to refer your case to “Her Majesty’s Magistrate,” it’s a scam.

VKM