Raising Red Flags on Your Tax Return

tax returnsMost of our readers understand that certain kinds of mistakes raise red flags at the Internal Revenue Service; and when those crimson flags fly, audits are kicked off. Common red flags include the following: earning lots and lots of money, claiming deductions that are not in line with your earnings, trying to claim your garage as a "home office," and so on.

Less well known are red flags hoisted, for instance, when the IRS sees that you have a large amount in a foreign account. With an ongoing focus on offshore accounts, the federal agency has a much clearer idea of who has money and where it is. The managing director of an accounting firm told Time and CNN that it is increasingly "important to disclose these accounts and file proper FBARs, [foreign bank account disclosure forms] which are not part of the tax return."

Red flags also go up for members of the so-called sharing economy that includes Uber, Airbnb, TaskRabbit, Homejoy and similar peer-to-peer ventures. What some participants often don't realize is that they can be considered self-employed and are expected to shoulder the tax demands of that designation.

A red flag over a white lie? Yup, if you lie about health insurance coverage, you might be hit with a penalty or even an audit, the two news sources say. This is easy for the IRS to check on, say tax experts, so honesty is the best policy.

Those who claim to be real estate professionals in order to transform a passive financial loss on a rental property into active losses can also raise the flag and be subject to all manner of inquiry from the IRS about income, deductions, claims and more over the past six years.

Those facing compliance issues with an FBAR can speak with qualified, experienced Cleveland tax lawyers who understand how to resolve outstanding tax matters, negotiate for clients favorable outcomes and appeal findings of tax audits.

Contact Robert J. Fedor, Esq.