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  • Writer's pictureMike V.

Meaningful Ways To Avoid Interest From IRS

While having high income raises your chances of an audit, it's not the only thing that can make the IRS single out your return. Even though the IRS may be just getting back on its feet after the shutdown don't assume you can pull a fast one on your tax return this year. Of the nearly 148 million individual tax returns filed in 2016, just under 1 million (about 0.7%) were audited, according to the latest available IRS data. The one item that puts you most at risk for an audit is making a lot of money. If you earn more than $1 million, the audit rate jumps to 5.8%, IRS data show. Income isn't the only consideration.

Here are some things that could cause the IRS to audit your tax return.

Large charitable donations

While the IRS already has been known to scrutinize tax returns with a large charitable-donation deduction relative to the reported income on the return, there's a chance those inquiries could rise. The tax break for charitable contributions remains. You must itemize your deductions. The total of all your deductions would need to exceed the nearly doubled standard deduction — for example, it's now $24,000 for married couples, up from $12,700, and $12,000 for singles, up from $6,350. The IRS knows how much taxpayers at various income levels typically donate. So if your charitable-contribution deduction is high relative to your income or in comparison to your income peers, it could trigger interest from the agency. "That's definitely a red flag," said Cari Weston, a CPA and director of for the American Institute of CPAs.

Rental activity

The new tax law limits the deduction for state and local taxes — a.k.a., SALT — to $10,000. If this has spurred you to, say, rent a room in your house so you can take advantage of other rules that would reduce your tax bill, be aware that the IRS could be on the lookout for abuse. "That already was a higher area of audit and it might be higher now," Weston said.

If you rent out space — whether a whole house or a room — for more than 14 days of the year, you must report the income to the IRS. Yet you also get to reduce the taxable amount of that income by deducting a variety of related expenses. Costs such as local licensing, fees you pay to online platforms, advertising and marketing are all associated business costs that could be deductible. Other home expenses — repairs, mortgage interest, property taxes, utilities — are deductible on a prorated basis tied to the number of days you rented out the house. If you do decide to rent, make sure you have the documentation to substantiate all of your income and expenses. While it's not uncommon for rental activity to generate a loss — i.e., the space could go unrented for a stretch of time — repeated losses also can be a red flag. If your rental puts up losses year after year, that's a red flag to the IRS.

Unreported income

One of the consistent areas that can cause the IRS to question your return is a discrepancy between your reported income and the information the agency has. All those forms you receive showing income — i.e., your W-2 from work, a 1099-MISC or 1099-K reporting side income or 1099-INT showing taxable interest of $10 or more on a bank account — also go to the IRS. And if you fail to report any of those earnings, you'll hear from the IRS — the discrepancy will generate an automatic letter. The No. 1 thing that causes you to get a letter from the IRS is failing to report all your income.

Overseas accounts

If you own an account in a foreign country, make sure you report it if you are required to — the penalties for willful violation of reporting rules can be steep. For U.S. citizens living on U.S. soil, if the value of your overseas account's assets was more than $50,000 you must report it. Keep in mind that the IRS might find out about overseas accounts even if you don't disclose them: Foreign institutions are also required to disclose account holdings by U.S. citizens.

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