It’s the 1 percent no one wants to be a part of: the share of Americans who get audited.
For example, some tax officials may take note if a small business owner boasts online about business projects taking place in multiple states but doesn’t report that income to the IRS and the respective state tax authorities, says Gevertzman. Likewise, taxpayers who claim they are having financial difficulties in an effort to reduce the taxes they owe should not post on social media about how much business is booming.
The IRS says audit decisions are based on the information taxpayers provide on their returns, not what they post on social media. The agency, however, might monitor publicly available information to help with an existing case. And agents are not allowed to use fake profiles or deceive people on social media sites to collect information.
But even less obvious income should be reported, tax pros say. This includes income earned by self-employed individuals that may not appear on a 1099 form. People should also report gambling winnings, which casinos must generally report to the IRS, says Melanie Lauridsen, a technical manager on the tax staff for the American Institute of Certified Public Accountants. For instance, winnings of at least $1,200 from a bingo game or slot machine must be reported, according to IRS rules, as well as prizes of more than $5,000 from a poker tournament, though the requirements vary per game. (Gambling winnings can also be offset by losses if taxpayers can provide receipts and other documentation.)
People also need to report prizes they don’t realize are taxable, like the baseball fan who catches a home run ball that could be worth hundreds or thousands of dollars, says Lauridsen. Any athletes bringing home medals from the Winter Olympics in Sochi may also have to face the tax man when they return.
Taxpayers often forget, for instance, that only 50 percent of business meal and entertainment expenses can be deducted, and they must be identified as business costs. People looking to write off travel expenses should keep logs of business trips and visits made to clients to work-related travel costs from those incurred on personal trips.
And even though the IRS has introduced a simplified option for claiming the home office deduction, the office still has to meet the main requirement of being used exclusively for business and of being the main place of business. That means that if the children are using the room to play games or watch TV, the office gets disqualified, says Lauridsen.
The rules apply to anyone who was paid more than $1,800 last year or $1,900 this year. Often, families don’t realize their error until they’ve parted ways with the nanny and he or she tries to file for unemployment benefits and state authorities learn the person was paid off the books, says Breedlove. Those families then need to pay any back taxes and penalties owed and could be found guilty of tax evasion, she says.
Families should also avoid incorrectly listing the nanny as an employee of a small business they may own, which could lead to an exaggeration of business credits and deductions.
Clothes and home appliances must be valued at their thrift store prices and not their original sale prices, says Lauridsen of the AICPA. “People have a tendency to be emotionally attached to their things so they have a tendency to over value them when they’re doing charitable contributions,” she says. Salvation Army and Goodwill offer guides to help donors determine the value of certain items.
Pricier items like paintings, homes and land need to be appraised at the time of donation. Donated cars, which are likely to be sold by charitable organizations, will be valued based on the price that the group gets for selling the car.
The IRS also looks to see if taxpayers are making changes to try to make the venture profitable and if they depend on that income to live on. “ You’ve got to show why it’s still a business,” says Gevertzman. Those who don’t make a good case may be suspected of investing in the hobby solely for the purpose of creating a loss that could be used to reduce their tax bill—and they could owe penalties and interest for any taxes they underpaid in the past.
Some people who accidentally reverse numbers or make enter incorrect Social Security numbers and checking account information could also have their returns held up and their refunds delayed says Lauridsen of the AICPA. Many of these errors can be caught early or avoided through electronic filing. It also helps to use exact numbers, since rounded numbers may give the IRS reason to request more specific figures and documentation.
This article is reprinted with permission from MarketWatch.com. © 2015 Dow, Jones & Co., Inc. All Rights Reserved.