When handing in a tax return, one of the most worrying parts of the process stems from what are known as Red Flags. You can be handing in information that you believe is correct, but could be making a red alert go off somewhere in the IRS. These kind of Red Flag events tend to bring out a greater level of scrutiny on your taxation. When anything like this shows up in your returns, then you can likely expect some form of audit or discussion to take place.
Knowing what is and is not a red flag, though, can be a bit of a challenge that needs a fair amount of planning to get around. So, what are some of the most common red flags that showed up on tax returns in the past? What should you be looking to avoid doing when it comes to handing in your returns?
For one, the most common mistake is a failure to report all of your income. People try and be smart and look to miss out certain levels of income. Do this long enough, and you will be caught out. The more sources of income that you have, the easier it is to hide and the harder it is to track.
Business expenses, as you might imagine, are the next on the line to mess around with and try to manipulate. People who are too excessive and creative with their expenses will get asked what they are doing – and if the answer is not satisfactory, you can find yourself in a bit of trouble. From take-home vehicles to trying to get a few dinner dates in there as business expenses, it’s very easy to get caught doing this – so don’t.
Another common mistake is to do with foreign finance, if you use a foreign bank account instead. This means that all American asset owners need to be identified by the American government via the foreign bank. Any assets worth over $50,000 in a foreign bank must be reported via a Form 8938. A failure to do so will see you get a little chap at the door.
As ever, you should look to hire a CPA to help you manage your taxes in the right manner. Giving out the wrong information is likely to cause you a bit of a headache; a CPA can help you to avoid needing an aspirin!
