1. REPORT all income
IRS receives copies of 1099s and W-2s from your work, bank, buyers – people who pay you. Failing to report a W-2 wage statement or1099 subcontract income is flirting with IRS scrutiny.
2. Check your occupation
Your occupation must be consistent with your income and expenses. It does not make sense for an Uber Eats or Pizza delivery guy to report zero tips. So is an investor with zero interest or dividend income.
3. Dependent of another
Don’t claim a dependent relative without verifying with child’s parents or guardians. IRS computers automatically tract and identify dependents who are claimed more than once.
4. Be careful with Earned Income Credit
This refundable credit is easy money - a breeding ground for abuse. It’s a source of fraud, a cause of IRS audits.
5. Don’t estimate mortgage interest
Deduct exact amounts of mortgage interest that appear on form 1098. Don’t estimate. Form 1098 is reported to the IRS where computers match amounts from banks with your tax return.
6. Don’t attract attention to yourself by taking outrageous deductions
Submit a return that gets “lost” in the crowd. Don’t stick out with red flags such as big round numbers or material miscellaneous deduction. Don’t draw attention to yourself.
Get lost… I mean, get lost in a crowd of taxpayers and disappear in a sea of returns.
7. Forgiven debt
Be wary of Form 1099-A, 1099-C, or 1099-S that represent debt relief from credit card debts, real estate foreclosure, abandonment, or short sale. These forms may look innocent but they can create troubles if you don’t report them correctly. Muy problema.
8. Stay away from Schedule C – Income from business or profession
It’s a lightning rod for audits. Schedule C puts you at the top of the food chain for IRS consumption. Majority of audit cases that I handle come from Schedule Cs. The government’s chances of collecting taxes, penalties, and interest from Schedule C audits are higher than the rest of the population.
9. Consider a corporation or LLC
Corporate audit risk is about one tenth of a sole proprietor filing Schedule C. Recent studies estimate that 75% of Schedule Cs are not accurate. If you own rental real estate or a business, take issues out of your personal income tax into an LLC that can elect to file either as a corporation or partnership.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].