ENID, Okla. —
In my last article, I discussed the audit process and the incorrect perceptions that filing for an extension or filing an amended return would trigger an audit.
This article discusses some items that frequently will result in a tax return being subjected to the audit process.
Not reporting income you received definitely will result in the return being audited. As the requirements for reporting income using the various versions of Form 1099 have increased, the Internal Revenue Service (IRS) has a greater ability to track the reporting on both the payer’s and recipient’s tax returns. The matching program the IRS uses will find the error if the recipient fails to report the income on the return.
In addition to 1099’s, gambling winnings are reported to the IRS and to the winner using form W-2G. If you receive a W-2G for your gambling winnings, the amount of winnings shown must be reported on the tax return. Gambling losses are allowed to be used to offset gambling winnings but both items must be reported and only losses to the extent of winnings are deductible.
Claiming a loss for a hobby in excess of income will result in the audit of the return. The “hobby loss rules” only allow expenses that relate to a hobby to be deducted as long as they do not exceed income the hobby produces. For example, if it costs $3,000 to produce items that are sold and the sales income from these items is only $2,800, you can only deduct $2,800 of your expenses not the full $3,000 spent.
Careless errors and mistakes, such as making math errors and entering a wrong Social Security number, will trigger an examination of a tax return. Calculations on a return are checked as are Social Security numbers. An error in either will result in a letter from the IRS, and the mistake will need to be corrected. With computerized tax software these issues are less common; however, a tax return should be double checked for these errors.
Current law requires the disclosure of foreign bank accounts. If you have such an account and you fail to provide the information about the foreign account to the IRS, you will definitely be contacted by the IRS. It is not illegal to have such an account, but the information must be disclosed.
The rules concerning these types of accounts were enacted in 2010.
These are only a few of the issues that may result in an audit. The IRS only audits about one percent of individual tax returns; however, if you are the taxpayer being audited, this is not a consoling statement.
To avoid an audit, it is important to understand the tax rules, and if your situation is slightly complex, it is advisable to seek the services and advice of a competent tax preparer.
Be sure you always keep copies of receipts, statements and other supporting documents used when completing your tax return should you be audited and asked to provide additional information.
Hobbs is Oklahoma State University assistant extension specialist.