14 Sep Avoiding IRS Audit: 6 Taxable Income You Should Report
Nobody wants to get audited by the Internal Revenue Service (IRS). It’s just too much hassle. You have to go over your records and documents in order to deal with the IRS. In other cases, you might actually have to hire a tax lawyer. So to prevent tax hassles, here are taxable incomes you should report to the IRS to avoid an audit.
Salaries & Wages
These are the most basic individual taxable income. Uncle Sam always gets part of one’s salary or wage in a bid to fuel the government’s infrastructure projects as well as social services. So it doesn’t matter if you had your wage or salary antedated, as long as it is your salary within the year, it will be charged in the year it was earned. In the same manner, if you ask your boss to issue the check under a kin’s name, you still have to report that earning to the IRS under your tax return. Bonuses are included in this too. These are considered part of your wage or salary.
Whatever you earn from investments is considered taxable income. Make sure you report this in your tax return. Earnings include sale from stocks and bonds, rent from investment properties, bank account, business earnings, among others. In the case of the stock or stocks, you don’t have to pay for the entire amount. You only have to pay tax from what you actually earned from the sale—meaning you deduct the base amount of the stocks.
For earnings from rent, while you have to report them in your tax return, your tax may just be offset by some deductions you are authorized to have. The deductions are from expenses in maintaining the rental property like repairs, improvements, and depreciation.
Taxes are also imposed on savings and interests on checking accounts, as well as investments on digital currencies. Some of the other taxes are imposed on the income you earn from business ventures like your share in a corporation or partnership.
If it sounds archaic, know that there are still modern barter systems in this generation. There are products and services you received as payment for outgoing products and services. The tax there will be taken from the market value of the products or services you received. Say you are an interior designer. You task an a dentist to do a veneer replacement for you. In return, you have to do design work in his house. Whatever the value of that dental work will be considered as taxable income on your part.
These are extra non-cash compensation on your part. One such example is having a company-issued car. The market value of this car will be considered taxable income. Another example is the free meal that some people enjoy from their company. The same process is followed—the market value of the meal or meals that you enjoy will be considered taxable income. Other fringe benefits include transportation allowance, communication allowance, etc.
Among the benefits exempted from tax is the health insurance that the company provides and meals that are low in value and are infrequently given. One such example is when your boss feels like treating his employees to a pizza party because it’s his birthday. A birthday is celebrated only once a year so this pizza party cannot be considered a regular occurrence, hence, it’s not among the taxed fringe benefits.
Not all people have this, of course. Those who have retired are not immune to taxes. Just because they are no longer working doesn’t mean they will no longer be taxed. Retirement plans like the Individual Retirement Account, 401(k) and 403b are all considered taxable income. Accordingly, up to 85% of Social Security benefits may also be taxed.
Those who receive alimony should report it as well because this is considered a taxable income. However, the person who gives the alimony will enjoy some benefit because the amount can be deducted from his taxable income.
Now that you have that information, it’s time to look at the many ways you can avoid a tax audit. Here are some of them;
Report all forms of income
Six taxable incomes are mentioned above—these should be reported to the IRS or else you can just prepare to receive a notice of tax audit from the government’s tax collection agency. Report all income so you will remain on the good side of the IRS. It’s not really that bad to be audited. The IRS will not automatically take away your properties as long as you will be able to provide the appropriate information about your income and you pay the appropriate amount of tax. But it is a hassle. You don’t want that kind of stress in your life—going through documents, possibly meeting with a lawyer and in-depth discussion of your financial standing.
Check your figures
The percentage of taxpayers that are actually audited by the IRS is quite low. But it is slowly increasing over the years with the government noticing a lot of wily Americans trying to circumvent the law in order to pay less than the required tax amount or none at all. However, you have to take into consideration that among those low percentage are some people who are actually audited just because of simple mistakes in the tax return. This is why you have to thoroughly check the figures in your document. Sometimes, it’s actually safer to just pay a professional to do your tax return. This is their expertise, so they know better than you when it comes to tax matters.
Honesty is the best policy
The consequences could be worse if the IRS realizes that you were actually lying about your income. Remember that the IRS is an agency of the government. It has the resources to actually trace your financial situation. So make sure you only put down the right information in your tax return.