3 More Common Mistakes That May Get You Audited

Last month, we covered three of the most common miscues that may get you audited. As you will remember, we pointed out that when your tax return doesn’t match what a third-party reported to the IRS, you could be in for one of those dreaded “uh-oh” letters from Uncle Sam. Another one was if you were to ignore repeated letters from the IRS how that could be detrimental to your wallet’s health. Finally, we pointed out that if you were to deduct items that your employer could have reimbursed you for, the IRS will likely catch that and deny your deductions.

This month, we will cover three more items on your return that could cause tax heartburn. Remember that there are tax antacids that can neutralize them and we will talk about them as well. And even though Tax Day has come and gone, this information will help you in the years to come as you pursue your acting dreams.

1. Incorrectly claiming charitable donations.
Everyone likes to be charitable, right? But even that can get you in the IRS crosshairs if you’re not careful.

The IRS will often audit tax returns with large charitable contributions. If your deductions appear to be disproportionally large compared to your income, or if you fail to file the correct supporting forms—or, worse yet, fail to properly complete the correct sections of the IRS forms—you are ripe for an audit.

In 2012, the IRS won a couple of big Tax Court cases. In one example, the taxpayers were denied over $20,000 in church contributions simply because their church did not include the phrase “no goods or services were provided” on the acknowledgment of the contribution. This is one of those cases that seems unfair, but then again, the Tax Code is not fair. The IRS is often allowed to trip you up over a technicality. In this case, the IRS acknowledged that the donation was, in fact, made to the church, but because the church failed to follow their requirement, the taxpayer was denied the donation. You would think that the IRS should have penalized the church for violating the rules. But they preferred to go after the easier target. The sad thing is that the Tax Court agreed with the IRS.

In another case, the taxpayers’ charitable donation of $18 million of real estate was denied, even though the IRS and Court acknowledged it was legitimate. The taxpayers again lost out on a technicality because they completed page two of Form 8283 incorrectly by not having a qualified appraiser sign the correct section of the form. The IRS and the Court acknowledged that the gift was, in fact, given to a qualified foundation, but it was denied over a procedure not being followed to the letter. Ouch!

READ: 5 Tips to Make Tax Season Easier for Actors

Don’t think you’re immune. The IRS frequently denies even small charitable donations if the procedures are not followed. If you are audited, the IRS will automatically deny every monetary gift of $250 or more if you don’t have an acknowledgment letter from the charity for the amount of the donation, a description of any property donated, and whether the organization provided any “goods or services.” For non-cash charitable donations, you must be able to prove the condition of the items given and have support for the value of the item you are deducting. If your donation is worth more than $5,000, you need a qualified appraisal of the property and the appraiser’s signature on Form 8283, Section B.

2. Not understanding how IRS “DIF” scores work.
What’s that? A “DIF” score? When your tax return is filed, the IRS computers compare it against a database called the national Discriminate Information Function (DIF). That’s a very nerdy mouthful!

This score is based on averages in many categories such as income, family size, where you live, your occupation, and how you earn your money. If your tax return falls outside the averages, your DIF score rises, along with your chance of an unwelcome letter from the IRS letting you know you are being audited.

3. Not showing enough income on your return.
Yes, you read that right: not making enough income can draw IRS scrutiny. You can actually be audited for being too poor. I know, I said that three times because it seems so far-fetched but it’s true.

Many times, performers don’t get a W-2 (many times they do, I know); they get a 1099 and are considered “self-employed.” People who are classified as self-employed are being audited because the IRS believes they reported too little income and too many expenses. For example, let’s say you reported $30,000 in income for your “business.” The IRS will call you in because based on your occupation as a performer, your deductions, zip code, and family size, they have data reporting you need at least $49,000 to pay your bills. Therefore, you must have unreported income.

Unfortunately, the IRS computers do not account for a frugal lifestyle or non-taxable resources, such as child support, living off credit cards, savings, or help from family members. Since you did not report more income on your tax return, you are forced to do battle with the IRS because they may believe you are not being entirely truthful.

Next month, I’ll cover three more of the nine common miscues that may get you audited as well as one bonus (the “goof” if you do get audited). Don’t miss it!