Stay Cool, But Beware! 5 Summer Activities That Could Trigger an IRS Audit
Summer is here, and you’re probably looking forward to enjoying some fun activities with your friends and family. Whether it’s hitting the beach, hosting a barbecue, or taking a road trip, there’s no shortage of ways to make the most of the sunny season. But before you get too carried away, you might want to be aware of some potential tax pitfalls that could land you in hot water with the IRS. Here are five summer activities that could trigger an IRS audit and how to avoid them.
1. Selling stuff online or at a garage sale
If you’re looking for some extra cash or just want to declutter your home, you might be tempted to sell some of your unwanted items online or at a garage sale. But be careful: if you make a profit from your sales, you may have to report it as income on your tax return.
The IRS has a computer system that scans every tax return for anomalies and compares it to those of other taxpayers with similar income levels. If you don’t report all your income, including any gains from online or garage sales, you could raise a red flag and get audited.
To avoid this, keep track of how much you paid for the items you sell and how much you sold them for. If you sell them for more than you paid, you have a taxable gain. If you sell them for less than you paid, you have a loss, which is not deductible. You should also keep receipts or other records of your transactions in case the IRS questions your income.
2. Taking a vacation rental deduction
Another way to make some money in the summer is to rent out your home or a part of it to travelers. This can be a great source of income, but it also comes with some tax rules that you need to follow. Depending on how long you rent out your property and how much personal use you make of it, you can deduct some or all of your rental expenses, such as mortgage interest, property taxes, utilities, repairs, and depreciation.
However, if you claim too many deductions or don’t report all your rental income, you could attract the attention of the IRS and face an audit.
To avoid this, make sure you understand the tax rules for vacation rentals and report your income and expenses accurately on Schedule E of Form 1040. You should also keep detailed records of your rental activity, such as receipts, invoices, contracts, calendars, and logs.
3. Claiming too many charitable donations
Summer is a season of giving, and many people like to donate money or goods to their favorite charities. This is not only a noble gesture, but also a tax benefit: you can deduct your charitable contributions if you itemize your deductions on Schedule A of Form 1040.
However, if you claim too many donations or don’t have proper documentation to back them up, you could trigger an IRS audit.
To avoid this, make sure you only deduct donations that are made to qualified organizations and that are actually paid in cash or property during the year. You should also keep receipts or other written records of your donations that show the name of the organization, the date and amount of the contribution, and a description of any property donated. For donations of property worth more than $500, you may need to file Form 8283 and attach an appraisal.
4. Showing off cash online
Showing off cash online may not directly trigger an IRS audit, but it could raise some red flags if your reported income does not match your lifestyle. The IRS uses a computer system to compare your tax return against norms for similar returns and may select your return for audit if it detects any discrepancies or suspicious activity.
The IRS also conducts related examinations, which means they may audit your return if it involves transactions with other taxpayers who have been selected for audit. Therefore, if you flaunt your wealth online, you may attract unwanted attention from the IRS or other authorities who may question the source of your income and whether you have paid your taxes correctly. To avoid an audit, you should always report all your income, keep accurate records of your expenses and deductions, and file your tax return correctly and on time.
5. Engaging in digital asset transactions
If you’re into cryptocurrencies, non-fungible tokens (NFTs), or other digital assets, you may have engaged in some transactions involving these assets during the summer. These transactions could include buying, selling, exchanging, or receiving digital assets as income or gifts.
However, you may not be aware that these transactions are taxable and have to be reported on your tax return. The IRS considers digital assets to be property and has issued some guidance on how to treat them for tax purposes. If you don’t report these transactions or don’t pay the tax due on them, you could face an IRS audit.
The IRS has increased its enforcement efforts in tracking digital asset transactions by using data analytics and artificial intelligence. Form 1040 now includes a question asking whether you have engaged in any transaction involving digital assets during the year.
Therefore, make sure you keep records of all your digital asset transactions, such as dates, amounts, values, and costs. You should also report these transactions on the appropriate forms, such as Schedule D, Schedule 1, or Form 8949. You should also answer the question on Form 1040 honestly and accurately.
Conclusion
Summer is a time to relax and have fun, but don’t let your guard down when it comes to your taxes. The IRS is always on the lookout for signs of tax evasion or fraud, and some of your summer activities could trigger an audit if you’re not careful. By following the tips above, you can enjoy your summer without worrying about the IRS knocking on your door.
Frequently Asked Questions
- Who does the IRS audit the most?
The IRS audits a variety of taxpayers, including individuals, businesses, and organizations. However, individuals with higher incomes are more likely to be audited due to their complex financial situations and the potential for discrepancies in their tax returns, and those who claim certain credits such as the Child Tax Credit and the Earned Income Tax Credit.
- What is the most common type of IRS audit?
The most common type of IRS audit is the correspondence audit, also known as a mail audit. In this type of audit, the IRS sends a letter requesting additional information or clarification regarding certain items on the taxpayer’s return. Correspondence audits are typically less invasive and can often be resolved by providing the requested documentation or explanation through mail.
- What are the reasons for auditing?
The IRS conducts audits for different reasons, such as identifying discrepancies or errors in tax returns, randomly selecting taxpayers for compliance checks, matching inconsistencies between reported information and data from other sources and investigating high-risk activities like cash-intensive businesses or excessive deductions.
- What is the limit of tax audits?
There is no specific limit on the duration of a tax audit. The length can vary based on factors such as the complexity of the taxpayer’s financial situation, the issues being examined, and the cooperation of the taxpayer and their representatives. Some audits may be resolved quickly, while others can take months or even years for complex cases.
- What raises red flags with the IRS?
Several factors raise red flags with the IRS and increase the likelihood of an audit. These include significant inconsistencies or errors in income reporting, claiming excessive deductions or credits compared to reported income, failure to report or underreporting income (especially from offshore accounts), engaging in cash transactions or cash-intensive business activities, taking questionable deductions or using aggressive tax strategies, being self-employed or working in industries known for tax non-compliance, and random selection in the IRS’s auditing process.
- What type of businesses get audited the most?
While the IRS audits businesses across various industries, certain types of businesses are more likely to be audited. These include cash-intensive businesses such as restaurants and retail establishments, self-employed individuals and independent contractors, high-income businesses in sectors like healthcare and real estate, and industries with complex tax regulations such as construction and professional services. However, being in these industries does not guarantee an audit, as selection involves various factors and risk assessment by the IRS.
