Every year brings dangers of filing a return that raises a red flag leading to an IRS tax audit. Trouble spots historically include outsized contributions and other deductions, foreign income and accounts and suspicious income. What do high-net-worth taxpayers have to watch for this year?
“Did you answer the foreign banking questions on Schedule B?” said Laura LaForgia, a CPA and managing director at CBIZ Marks Paneth in New York. “Do you know that if you have a joint foreign bank account, both parties must file FBARs? Does your FACTA reporting match what’s reported to the IRS? Is your business really a business or it is really a hobby?”
LaForgia also warned against claiming unreasonable home-office deductions and mortgage-interest expenses, as well as submitting incomplete paperwork and lacking professional appraisals for non-cash contributions.
“The IRS has launched a high-wealth audit program focusing on high-net-worth individuals with especially complex tax returns,” said Jeff Watkins, partner at Plante Moran Wealth Management in Denver. “In most cases, these audits involve taxpayers that have a related partnership, S corporation, trust or private charitable foundation.”
“Oversized contributions are red flags, but unique contributions with complicated valuations are also,” LaForgia said. “In the case of non-cash contributions, are you donating publicly traded securities that are easily identified and verified, or something exotic like an interest in an alternative investment or a rare piece of art?
“Did you answer the cryptocurrency question on your return?” she added.
“Cryptocurrency has to be one of the IRS’s biggest red flags at the moment,” said Abby Donnellan, a CPA at senior tax strategist at Moneta in St Louis. “Since there are no reporting requirements for cryptocurrency companies yet, the IRS has a question on individual returns to ask if the taxpayer has been involved in any cryptocurrency transactions. Additionally, all cryptocurrency sales should be reported as a gain/loss on the tax return.
“From an estate perspective, not fully disclosing all gifts when filing a gift tax return (Form 709) can be a red flag as well,” Donnellan said. “Typically, Form 709s that don’t have a tax due are generally subjected to less scrutiny.”
Some audit triggers are constant year after year. “Conservation easements or other large charitable deductions usually spark some IRS attention,” Donnellan said. “Wealthy taxpayers typically have some sort of foreign income and reporting; large amounts of offshore money can flag the IRS.”