Be sure to keep all of your supporting documents, including receipts for cash and property contributions made during the year. Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. They can write off losses without limitation.
The IRS actively scrutinizes rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business.
The IRS started its real estate professional audit project several years ago, and this successful program continues to bear fruit. Alimony paid by cash or check is deductible by the payer and taxable to the recipient, provided certain requirements are met. For instance, the payments must be made under a divorce or separate maintenance decree or written separation agreement. It also wants to make sure that both the payer and the recipient properly reported alimony on their respective returns.
A mismatch in reporting by ex-spouses will almost certainly trigger an audit. You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit.
If your activity generates profit three out of every five years or two out of seven years for horse breeding , the law presumes that you're in business to make a profit, unless the IRS establishes otherwise. Be sure to keep supporting documents for all expenses. Big deductions for meals, travel and entertainment are always ripe for audit, whether taken on Schedule C by business owners or on Schedule A by employees. A large write-off will set off alarm bells, especially if the amount seems too high for the business or profession.
Agents are on the lookout for personal meals or claims that don't satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, place, people attending, business purpose, and nature of the discussion or meeting.
Without proper documentation, your deduction is toast. The IRS is intensely interested in people with money stashed outside the U. The IRS also uses voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean — in exchange for reduced penalties. Failure to report a foreign bank account can lead to severe penalties. Even businesses that show a loss instead of a profit have to file tax returns. Drop off the face of the earth with the IRS for a couple of years, and when you show up again, the tax man will likely invite you in to explain things.
Likewise, you could be audited if you show a huge increase from year to year. Make sure that your expenses make sense in proportion to your business income. Keep your receipts and indicate the business purpose each expense is for.
This is another area some people take advantage of, so the IRS tends to look carefully. Except for the costs of commuting, small business owners are entitled to claim business-related auto expenses on their taxes. But as with travel and entertainment, keep proper records such as mileage logs and calendar entries that include the business purpose, as taking this deduction may increase your chance of being audited.
Second, always respond to IRS requests in a timely manner, and always be cooperative and polite. The agency has an information-packed web page that can help you prepare.
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Taxes Solving Tax Issues. Table of Contents Expand. Table of Contents. The Computer Trigger. You Earn a Lot … or Very Little. You Overlooked Income. You Spent or Deposited a Lot. You Claimed a Lot of Deductions. You're Self-Employed.
Your Business Is Home-Based. You Own a Cash Business. You Claim a Hobby as a Business. You Have Assets Abroad. You Have Investment Income. Don't Sweat the Math.
By Beverly Bird. She also worked as a paralegal in the areas of tax law, bankruptcy, and family law from to Learn about our editorial policies. Reviewed by Eric Estevez. Learn about our Financial Review Board. Article Sources. Your Privacy Rights. To change or withdraw your consent choices for TheBalance. If a taxpayer receives a letter from the IRS alerting them to the fact that their individual tax return or their business tax return is under an IRS tax audit, it can be challenging to determine how to proceed.
Who is the best professional to assist with the IRS tax audit? What types of information can the IRS legally request when auditing an individual or business tax return?
Thorn has successfully helped hundreds of individuals, businesses, trusts, and foundations from around the country, and across the globe, with a variety of different types of IRS tax audits and state tax audits, including:.
Take a rare look inside the entire audit process, from when a taxpayer receives a letter from the IRS initiating an IRS tax audit to reaching a resolution, with an in-depth look at the importance of hiring an experienced tax attorney that works against the IRS every day.
In addition, in the letter the taxpayer receives via-regular mail, the IRS will usually ask for an in-person interview with the taxpayer and will request that the taxpayer bring all of their tax documentation to the interview. This is a crucial point because a taxpayer will not know what information the IRS already has in its possession. Ultimately, the goal of the IRS tax audit is to determine if the amount of income and tax reported on the tax return is correct according to the rules provided by Internal Revenue Code and the US Tax Laws.
While audits can happen randomly, the majority are triggered by the following events:. Just because a tax return triggers an IRS tax audit, the tax return was not necessarily filed incorrectly. In most cases, the taxpayer will not have to pay additional taxes or penalties.
For example, the taxpayer's name comes up in another type of IRS tax audit taking place. Lastly, there are several forms of financial disclosures and situations that could put a taxpayer at risk for an IRS tax audit. A few of the circumstances that potentially lead to an IRS tax audit concern whether or not you are in compliance with the numerous information reporting requirements contained in the United States tax laws.
Taxpayers conducting business overseas or performing business transactions using cryptocurrency have recently triggered many IRS tax audits. Also, the IRS may choose to audit a taxpayer whose return information does not match information reported by another party. Common examples include a taxpayer whose reported wages do not match the wages reported to the IRS by his employer, or whose reported income does not match information provided by his bank.
A tax attorney with extensive experience in the IRS Offshore Disclosure Programs can save a taxpayer thousands of dollars in tax, penalties, and interest. The first thing a person should do when they receive notification that they are under audit by the IRS is contact an experienced Boston tax attorney. An IRS audit is too serious a matter to handle without professional assistance.
You should hire an IRS tax audit attorney in Boston. Taxpayers who attempt to handle the IRS audit alone, can put themselves at risk for. Hiring Kevin E. Thorn and the counsel of Thorn Law Group could make a difference in saving millions of dollars and avoiding excruciating criminal prosecution. Kevin E. He has helped thousands of clients with their complicated IRS tax audits, including individual taxpayers, businesses, trusts, foundations, professionals, and more.
He has a deep understanding of the serious consequences that can result from an IRS audit, particularly one that is mishandled. In addition to hiring a Boston tax attorney, there are some other factors to consider when deciding how to handle an IRS tax audit.
It is common for the IRS to reach out via mail or in person. In these instances, the IRS agent assigned to your case could try to pressure you into giving them information that could incriminate you or be damaging to your IRS tax audit case. As a taxpayer, you have certain rights that the IRS agent will not fully explain before they try to engage in conversation.
When the IRS shows up, ask them politely to leave and inform them that you will be represented by an IRS tax audit attorney who will communicate with them on your behalf. Do not speak with them as you could potentially incriminate yourself, especially if the IRS employs tactics to catch you off guard. It can be difficult to determine why the IRS is asking certain questions.
It can also be difficult and uncomfortable to refuse to answer them, especially if you are unclear about your taxpayer rights. Thorn, to represent you through your IRS audit. By law, an attorney cannot share your information with a third party, including the IRS, without your consent. In fact, CPAs or other non-attorney representatives can actually be witnesses against their clients.
Only an experienced IRS tax audit attorney is truly able to keep your information safe and ensure that you have the best protection and guidance throughout your IRS audit. Protection is not guaranteed when you provide professionals other than a lawyer sensitive tax and financial information.
There is no legally recognized accountant-client privilege. A CPA may be forced to disclose sensitive information that would be protected and kept confidential if told to an attorney instead. There are no legal limitations for what information an accountant could be compelled to provide the IRS during an IRS tax audit or even after the audit.
In some cases, these professionals would be bound to supply the IRS with the requested information. In other words, a CPA could be used as an asset by the IRS in gathering information about you that would greatly disadvantage you during your IRS tax audit, and even become a witness against a taxpayer.
Hire someone who can offer you impermeable protection, such as Managing Partner, Kevin. Thorn, of Thorn Law Group. If you were to be audited by a mail-in audit, you would receive notification of the audit through the mail and then be responsible for sending the IRS all the requested material through the mail or by fax.
Even a mail-in IRS audit can have serious repercussions and should not be taken lightly. If you have been selected for a mail-in IRS audit but believe there is too much information required by the IRS to send it all through the mail, you can request to have a face-to-face audit.
A face-to-face IRS audit can be highly effective in the playing out of your IRS audit and therefore is best made by someone with experience. There are several reasons why you may be subject to a personal IRS audit, including inconsistencies in reporting throughout the years, changes in your financial history, the incorrect reporting of foreign assets, and even random selection.
For many, a personal IRS audit is costly and intrusive, resulting in more money paid to the IRS, and for some, even a criminal investigation. Thorn could make a huge difference in the outcome of your personal IRS audit.
A business IRS audit is a very serious matter that is a disruptive force for many businesses, both those that are innocent, as well as those and guilty of illegal tax and financial practices.
The IRS audits multi-million-dollar companies as well as local small businesses. IRS business audits are particularly dangerous because of the productivity loss and resource drain that occurs within the business for the duration of the IRS audit.
While the process of a business IRS audit may be costly for the business, not hiring the proper help to deal with it could be even more expensive. Businesses who do not hire an IRS audit attorney could lose millions of dollars in penalties, taxes, and fees and could be subject to an invasive, time consuming criminal IRS investigation.
This investigation not only affects business owners and CEOs, but also the innocent employees who are subjected to the investigation. Whether your business is a multinational company or a local small business, Kevin E. Thorn has the experience and knowledge needed to guide your business through its particular IRS audit. US taxpayers have a responsibility to report all foreign income and offshore bank accounts to the IRS, as well as declare all their foreign assets, even if they do not produce income.
If this reporting is not completed, or if it is completed incorrectly, an international IRS audit may be triggered. An international IRS audit could have serious consequences for the international taxpayer, including massive penalties and tax, invasive investigations, and, potentially even, incarceration.
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