Cash Income

Many people receive a substantial part of their income in cash. Some receive ALL of their income in cash. Waiters, taxi drivers, hairdressers, and people who work in the gaming industry are prime targets for an IRS audit. That’s in part because they receive much of their income in the form of cash tips. The best advice you will ever be given is to keep accurate records. You should use IRS publication 1244, "Employee’s Daily Record of Tips and Report to Employer" for tracking daily tips.

Itemized Deductions

Guess what very well could top of the list of items that trigger an audit? That’s itemized deductions that are unusually high based on your income. For example, lets say you make $35,000 and you show a charitable contribution of $7,000. That’s not reasonable for the income you have and, it’s very likely the IRS will take a closer look. Likewise, a medical deduction of $18,000 with income of $36,000 will trigger an audit unless explained in advance.

Divorce, Alimony, and Dependents

If you’re divorced, the IRS allows only one parent, usually the one living with the child to claim that child as a dependent. If that is not the case, you will need a tax waiver signed by the custodial parent to take the tax write-off. You need to know that the IRS matches tax deductions for alimony payments by one former spouse with the taxable income reported by the other.

Zero Wages, Zero Return

This is where a taxpayer attaches a Form 4852 (Substitute Form W-2) or a corrected Form 1099 that shows zero or little wages or other income. The taxpayer might also include a statement indicating she or he is rebutting the information submitted to the IRS by the payer. Think a long time about this one. An employer or company says that they paid you X dollars and you say NO they didn’t or you say that the money was not really taxable. Either way, whom would you believe?

In a twist on this scheme, filers enter zero income but report their withholding as normal. The hope is to receive a full refund for withholdings against NO income.

Moving Your Money Offshore

Many offshore or foreign accounts are being set up by banks, brokerages, accounting firms and others for (usually) affluent people to hide their money from the IRS. Offshore accounts are rarely used by people whose wages are reported to the IRS by employers. Interesting.

It has been estimated that 1 million to 2 million Americans have offshore credit-card accounts. These accounts are in tax-haven countries. The money generated in these accounts is legal so long as it is reported and taxes are paid. The failure to declare this income and to pay the tax on the income is a felony punishable by up to five years in prison.

The nice folks at the IRS have somehow convinced VISA, Master Card and American Express to turn over lists of any U.S. residents with credit card accounts located outside the United States. Of course the objective is to find out who has an offshore account and who has not reported the income derived from that account. Now it is possible for an individual to have an offshore account paid for with after tax money and use it for credit card purchases. The net result is NO tax obligation but what fun would that be for the IRS.

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