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article imageUncle Sam steps up income tax audits

By Michael Bearak     Feb 18, 2010 in Business
The United States' Internal Revenue service performed more tax audits last year than at any point in the entire decade. There are certain things that can flag you for an audit and are important to watch when doing your taxes this year.
Each year, as Americans fill out their tax returns and mail them in by the April 15 deadline, the IRS looks more carefully at what is sent in.
While some things may be common sense, like double and triple checking your numbers, or being incredibly detail-oriented in your filing, some points can often be overlooked if you aren't careful. An article by CNN on Wednesday outlined a number of things you need to watch out for when you do your filing this year.
Self-Employed?
This is somewhat tricky, but it is something the IRS is looking more and more carefully at each year. If you are self-employed, it had better be legitimate. That is not to say people are crooks, but some people turn a hobby into a business to bring in extra money. In these cases, your records or expenses versus revenue need to be extremely detailed.
It is recommended you have a separate bank account for your business and that you purchase a business license (they aren't that expensive). You should also consider registering to be an LLC, or something similar, in an effort to make your "small business" a real business and so that you're not trying to pull a fast one on the government.
If you try to take deductions, you have to prove your stream of income has exceeded your expenses for any three of the five most recent years. When the IRS determines you are not working at a profit, you will not be able to take deductions.
It is a very good idea of you are self-employed to hire a good accountant and attorney to walk you through all of this.
Overseas bank accounts
People often think of overseas bank accounts as something that appear in movies. Well, the United States' government has started cracking down on offshore accounts, and if an auditor sees you have large deposits in an offshore account it will cause them to take a deeper look.
According to Maureen McGetrick, a partner with BDO Seidman, "Foreign bank accounts have been all over the press lately--it's definitely a big thing this year."
McGetrick says you just need to fess up to the IRS and report any interest you received from overseas accounts.
Selling Stocks
This can be tricky because if you sit on stocks long enough, when you sell them the government is going to want to know what you made from the sale. Be sure to hunt down to the purchase price along with any splits and so forth.
In the event the stocks were a gift, you might have to hunt down the person who gave it to you and determine what they paid for them. If you put an unreasonable value on your sold stock it will raise the interest of the IRS. Good rule of thumb: Hire a broker so they can verify and hunt these things down for you. It is also important to know what your broker fees were because you'll have to report them as well. An accountant can also hunt these things down for you.
Making a donation
If you make a donation, get a receipt. The IRS is going look very carefully if your donations are out of line with what your income is. For example, you earn $50,000 per year and you claim to have deducted $20,000 in donations -- that will cause the IRS to take a deeper look. If you donate a single item you claim is worth more than $500, it needs to be appraised by a qualified individual. When you list what you have donated in the form of non-cash items, you need to appraise it for what the resale value would be.
High Earner
If you make a lot of money you need to hire an accountant. The IRS looks at high-income earners very simply as people who have more to hide. They also know that higher earners tend to have more deductions, businesses, second homes, charitable contributions, stocks and bonds, and so forth. With all of these things there is the chance for mistakes to be made.
It is estimated that people making $200,000 a year are 50 percent more likely to be audited than those making less. In 2009, the audits of people making $200,000 or more climbed 11 percent, while those making $1 million escalated by 30 percent.
Wealthy taxpayers need to be mindful of careless omissions, or wrong numbers, especially in regard to copies of forms the IRS receives.
More about Internal revenue service, Irs audits, Uncle sam, Tax season
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