You fail to report investment income from interest and dividends:
You must report interest and dividends from banks and brokers. If you fail to disclose such accounts to your spouse… err, the IRS, you could be courting an audit if the amounts are material. Remember that banks and brokers submit 1099-INT and 1099-DIV to the IRS. If you miss to report, there will be mismatch between IRS computer data base and your tax return. This oversight generates notice CP-2000 from the Service for unreported income.
You claimed Earned Income Tax Credit (EITC)
The earned income credit (EIC) is a refundable tax credit for certain low-income taxpayers. It was expanded to include taxpayers with no qualifying children.
The credit is based on the concept of negative income taxation. While the government collects taxes from the paying masses, it rebates taxes from you and me to taxpayers with low income.
But claiming the Earned Income Tax Credit also causes your return to be internally audited at the IRS. You won’t even know that the IRS is reviewing your return. If the IRS determines that you are not entitled to the credit and find some other interesting issues in your tax returns, you could be invited to visit the IRS office for an audit.
You have cash or other financial assets in a foreign country:
If you own a foreign bank account, brokerage account, mutual fund, or other financial account, you may be required to report the account annually to the government. If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR). FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.
The IRS already has a dossier on your foreign holdings and if you don’t report your financial assets, you have a high chance of getting audited.
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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.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits.” Readers may email tax questions to [email protected].