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Ask Phil: IRS Audits

Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses his 5 top tips for how to avoid an IRS audit. 

File Your Taxes: Some taxpayers don’t file because they think they don’t have to. The minimum requirement to file a tax return depends on your filing status and income, but generally most U.S. citizens and permanent residents need to file. Remember, if you don’t file when you’re required to, you will be hit with IRS penalties and interest. The IRS could also file a tax return on your behalf. While this might sound like a burden lifted off your own shoulders, this could be much worse than filing yourself because it can result in owing more taxes. You can use the IRS’s online Interactive Tax Assistant to find out if you need to file a tax return. 

Report All Your Income: Failing to report all your income is the quickest way to being audited by the IRS. Keep in mind that the IRS receives copies of every W-2, 1099, and other tax forms that you receive. They know exactly how much you earned in the previous year and if your reported income does not match what they have on file, you’re much more likely to be audited.  

Use Common Sense with Business Expenses: This tip is for the self-employed filers. The IRS requires all business expenses to be ordinary and necessary to be deductible during tax time. This means it should be common for your industry and necessary for the production of income. Excessive meals and entertainment, trips taken for non-business purposes, and commuting costs are examples of nondeductible business expenses. 

Keep Good Records of Income and Expenses: Keeping good records of income and expenses can not only help you monitor the progress and financial well-being of your business, but also keep track of your deductible expenses, prepare your tax returns, and substantiate claims made on your tax returns. The IRS recommends keeping returns, records, and other tax documents for at least three years. 

Be Wary of Multi-Year Losses: If your business consistently reports losses during tax time, the IRS will likely audit you. In addition, the IRS only allows you to write off losses for three of the five previous tax years. If you can’t prove your business is beginning to turn a profit, even a small one, the IRS can categorize your business as a hobby, at which point you will be unable to deduct any of your expenses. 

Tune in next Friday for another episode of “Ask Phil” where Phil will review common IRS tax forms. 

If You Think You’re at Risk of Being Audited by the IRS, Contact Us Today for a Free Consultation 

Are You At Risk of IRS Audits and Collections?

The Inflation Reduction Act of 2022 has equipped the IRS with more than $80 billion in funding. That means more audits and more enforcement. CEO David King and Lead Tax Attorney Philip Hwang provide helpful tips on what you can expect from the IRS moving forward and how you can resolve your tax burden.

Contact Us Today for a No-Obligation Free Consultation 

Gambling Income and Losses

gambling income and losses

When we think of gambling, our first thoughts may be of casino games or the lottery. However, the IRS requires all gambling income to be reported, including winnings from raffles, fantasy football, and even sports betting. With sports betting on the ballot in California in 2022, it might be a good time to revisit the IRS rules on gambling income and losses.  

All Gambling Income Must Be Reported 

All income earned through gambling must be reported to the IRS. Failing to do so can result in IRS penalties. This also includes any goods or trips won in a raffle or contest. For example, if you win a TV or a trip to Vegas in a raffle, you must claim the prize’s fair market value at the time that you won it.  

Reporting cash winnings is more straightforward, but taxpayers should know that they are not allowed to subtract the cost of gambling from their winnings. In other words, if you place a $10 bet and then win $500, your taxable winnings would be $500, not $490. Both cash and the value of prizes should be reported as “Other Income” on your Form 1040. Larger payouts will typically result in Form W-2G, which includes reportable winnings, the date won, withholding amount, and wager type. 

You Can Deduct Gambling Losses If You Itemize 

While you cannot deduct the cost of your wager from your winnings, you can deduct your losses as long as you itemize your deductions. You can deduct losses up to the amount of the gambling income claimed. For example, if you won $1,000 but lost $3,000, you can only deduct $1,000. You must also include the $1,000 won in your income.  

You Can Deduct More If You’re a Professional Gambler 

If you gamble to make a living, you are also not allowed to deduct losses that exceed your winnings. However, you would be considered a self-employed individual and would be able to deduct “business expenses.” This can include magazine subscriptions that relate to gambling, internet costs if you place bets online, and travel expenses.  

You Should Keep Adequate Records 

If you are ever audited, the IRS will expect to see detailed records of your gambling winnings and losses. Whether you gamble professionally or casually, you should record the date, name of the gambling establishment, type of wager made, amount won or lost, and the names of anyone with you during the gambling. You should also keep copies of receipts, W2-G forms, wager tickets, and anything else that can supplement your gambling log.  

Tax Relief for Gamblers 

Whether you gamble casually or professionally, you must always report all gambling winnings. It may be tempting to report large losses and downplay your winnings, but reporting losses typically raises red flags with the IRS. This means higher chances of being audited by the IRS, which is a whole other issue. In short, it’s always best to report your gambling income and losses accurately. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

How Will the Inflation Reduction Act Affect Your Taxes?

With the recent passing of The Inflation Reduction Act, individuals who have unfiled tax years or unpaid tax debt may now expect an increase in IRS collection enforcement. Optima CEO David King and Lead Tax Attorney Philip Hwang explain how the Inflation Reduction Act can directly affect taxpayers and how to get compliant with the IRS.

If You Need Tax Help, Contact Us Today for a Free Consultation 

How to Avoid a Tax Audit

Avoid tax Audit

While there is no guaranteed method of avoiding audits, there are things to steer clear of that could trigger an IRS audit. The Senate recently approved nearly $80 billion in IRS funding, with $45.6 billion for enforcement, which could lead to more audits.  Here are some things that the IRS has historically viewed as “red flags,” which could increase the chances of an audit for taxpayers. 

Reporting a Business Loss  

The IRS will surely be more inclined to audit a taxpayer who reports a net business loss, even if the loss is small. Reporting losses year after year will only increase IRS interest in your tax returns. Remember, it is mandatory to report all earnings in a tax year. However, it might be helpful to reconsider which expenses should be deducted from your tax return. Reporting even a small profit could reduce the chance of being audited by the IRS.  

Being Vague About Expenses 

When it comes to expenses, the more detail the better. This is especially true when categorizing them on your return. Try to avoid listing expenses under “Other Expenses” as this will lead to more scrutiny from the IRS. It may even be helpful to provide supplemental documentation explaining why certain expenses drastically increased or decreased for that year. Doing so can give potential auditors a valid explanation for such occurrences and possibly avoid a tax audit. Additionally, rounding dollar amounts are red flags for the IRS. You should always use exact dollar amounts on your tax return

Filing Late 

Some taxpayers believe that filing late can actually decrease the risk of being audited. However, filing on time, as well as paying on time, can help establish a history of IRS compliance. This will be far more beneficial in the long run.  

Claiming Excessive Deductions 

It is best to avoid any excessive expenses. For example, deducting the cost of your breakfast and lunch each workday may not be acceptable to the IRS. Excessive deductions for your donations to charitable organizations can also increase the chances of being audited. Inflating business expenses can result in being audited, especially if you try to claim large amounts for business entertainment or claim a vehicle that is used for business purposes 100 percent of the time. Also, remember to only claim the home office deduction for the portion of your home that is used exclusively for business purposes. When claiming this deduction, you will need to figure out how much square footage in your home is dedicated to your business. For tax year 2023, the rate for the simplified square footage calculation is $5 per square foot, with a maximum of 300 square feet or $1,500. 

Keeping Poor Records

Even the simplest tax situations require adequate records. If your finances are more complicated, then detailed records are necessary. Some taxpayers may feel inclined to estimate their expenses because they did not save receipts or documents. Unfortunately, the IRS views this as a red flag. It’s important to make sure you have detailed records for the past three tax years at minimum. Having items like your previous tax returns, medical bills, business receipts, real estate documents, and investment statements can help substantiate your claims and avoid an IRS audit.

Choosing the Wrong Filing Status

Your filing status (single, married filing jointly, married filing separately or head of household) determines how you treat many tax decisions. it affects what forms you’ll fill out, which deductions and credits you’ll take. It ultimately determines how much you will pay (or save) in taxes. Select the wrong status, and it will trigger a cascade of mistakes–maybe even an audit. On top of that, if you decide to file jointly with your spouse, this means you’re responsible for their errors. This includes deliberate falsehoods on your partner’s return, so make sure that you’re comfortable with what it says.

Tax Relief for Those Being Audited 

The chances of being audited are low, but those chances increase when the IRS notices red flags. The audit process can be very stressful. It is a tedious process that requires collecting information regarding your income, expenses, and itemized deductions. Failing an audit can result in a huge, unexpected tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit. Our team of qualified and dedicated tax professionals can help.  

If You Need Tax Help, Contact Us Today for a Free Consultation