Five Red Flags of Tax Returns

red flags tax returns

red flags tax returns
In March, Vermillion Financial Advisors prepare their clients for the upcoming tax season. We would like to provide you, our readers, with an article to supplement you in the preparation process of your taxes!

Audits normally total just over one percent of total tax returns filed, with big income and very low income earners more likely to get flagged. You may have heard that the government needs revenue, so audits are expected to increase. Let’s look at five red flags to keep in mind when preparing a tax return.


1. Unrealistic Deductions

For the typical tax return, the IRS is interested in seeing deductions in line with other taxpayers of similar incomes. Taking huge deductions is going to raise immediate concerns, so make sure everything itemized on Schedule A qualifies. Technology has allowed a number of workers to move from traditional large office space to home offices. The home office deduction is one of the trickier expenses to quantify, so keep meticulous records.

2. Mistakes in the numbers

When expecting a refund, there’s a rush to get the return completed as soon as possible. This might mean a miscalculation or submitting a return before receiving all necessary documents. Double check figures to ensure everything is accounted for. Also, there may be a bias against handwritten returns. Apparently, the IRS thinks computer technology is less likely to make a calculating error.

3. Schedule C

Filing a Schedule C raises the probability of an audit by quite a bit, especially if the filer is showing years of losses. Those using Schedule C might be tempted to be slightly more liberal in reporting expenses, so be sure spending claims are in line with similar businesses. For those grossing over $100,000, consider the benefits of incorporating.

4. Using a personal car for business

This is one of the most difficult deductions to track. Keeping a record of mileage and expenses for an entire year must only excite the most anal of taxpayers. When in doubt, most taking this deduction try to figure total mileage for the year and then calculate the percentage of time it was used for business.

5. Losses on rental property

For those that own rental property, a Schedule E is necessary. Unless an individual qualifies as a real estate professional, losses on rental property can be limited. If you’re engaging in a lot of real estate related business, be sure to investigate forming an LLC or qualifying as a real estate professional.


red flags tax returns

Note: The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendation for any individual. Please remember that past performance of investments may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this post serves as the receipt of, or as a substitute for, personalized investment advice from Vermillion Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed within this newsletter to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.

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