The Internal Revenue Service (IRS) is responsible for ensuring individuals and businesses, including real estate agents, pay their fair share of taxes.
While most tax audits are conducted randomly, certain red flags can increase the likelihood of an audit. As a real estate agent, it's essential to be aware of these potential triggers to avoid issues with the IRS. In this article, we'll discuss five red flags that may increase your chances of being audited.
Unreported or Underreported Income
One of the most significant red flags for the IRS is unreported or underreported income. Real estate agents often receive income from various sources, such as commissions, referral fees, and rental income. If you don't accurately report all sources of income on your tax return, the IRS may question the discrepancy, potentially leading to an audit. To prevent this issue, keep detailed records of all transactions and ensure you report all income on your tax return.
High Deductions Relative to Income
Another common trigger for tax audits is claiming high deductions relative to your income. While real estate agents are entitled to several tax deductions, such as advertising expenses, home office costs, and mileage, it's essential to claim only legitimate business expenses. If the IRS notices that your deductions seem disproportionately high compared to your income, they may suspect you're inflating your expenses or claiming personal costs as business expenses, which can lead to an audit. To avoid this, keep detailed records of your business expenses, and ensure you claim only those that are truly deductible.
Mixing Personal and Business Expenses
Real estate agents often use their personal vehicles, phones, and even homes for business purposes. While it's acceptable to claim a portion of these costs as business expenses, you must be careful not to mix personal and business expenses. The IRS may scrutinize your tax return if they believe you're claiming personal expenses as business deductions. To minimize the risk of an audit, maintain separate accounts for personal and business expenses, and use a dedicated credit card for business purchases.
Frequent Losses or Fluctuating Income
The IRS is likely to scrutinize tax returns that report consistent business losses or significant fluctuations in income. While real estate can be a volatile industry, the IRS may suspect that you're not accurately reporting your income or expenses if you consistently report losses or if your income varies dramatically from year to year. To avoid raising suspicions, maintain accurate and detailed financial records and consult with a tax professional to ensure you're reporting your income and expenses correctly.
Failing to Report Foreign Assets or Income
If you're a real estate agent with foreign assets or income, such as from overseas property investments or international clients, you must report these to the IRS. Failing to disclose foreign assets or income can trigger a tax audit, as the IRS is particularly interested in ensuring taxpayers pay taxes on their worldwide income. To avoid this issue, familiarize yourself with the Foreign Account Tax Compliance Act (FATCA) and other relevant tax regulations, and ensure you accurately report all foreign assets and income on your tax return.
Time to File
While the prospect of a tax audit can be intimidating, being aware of potential red flags and maintaining accurate financial records can help minimize the risk. By reporting all sources of income, claiming legitimate business deductions, separating personal and business expenses, and reporting foreign assets or income, you can reduce the likelihood of an IRS audit and ensure you're fulfilling your tax obligations as a real estate agent.
Have you done your taxes yet? Let us know in the comments or breathe a sigh of relief with your colleagues in one of our upcoming CE Classes!
This article is provided for general informational purposes only and should not be construed as tax, financial, or legal advice. The information contained in this article is not intended to serve as a substitute for professional advice from a qualified tax professional, accountant, or attorney. Each individual's circumstances are unique, and tax laws and regulations may change frequently. As a result, it's essential to consult with a qualified tax professional before making any decisions or taking any actions based on the information provided in this article.