12 Common Tax Mistakes That Could Lead to an IRS Audit

Neglecting to Report a Foreign Bank Account

During retirement, you might be planning to go on long vacations overseas. You might even want to open a foreign bank account to stash some money.

In that case, if you fail to disclose a foreign bank account you could end up with severe penalties- you’d be surprised how easy it is for U.S. authorities to gain information from foreign banks, so don’t try to trick the system.

You have to electronically file a FinCEN Form 114 (FBAR) by April 15 to report foreign accounts that total more than $10,000 at any time during the previous year. If you have more financial assets then you have to attach an IRS Form 8938.

Claiming Day-Trading Losses on Schedule C

Compared to investors, those who trade in securities have significant tax advantages. Your expenses are fully deductible and reported on Schedule C. Plus, your trader profits are exempt from self-employment tax. Another tax benefit? Traders who make a special section 475(f) election can deduct their losses, which will be treated as ordinary losses that aren’t subject to the $3,000 on capital losses.

OK, but how can you actually qualify as a trader? Well, you have to buy and sell securities frequently while looking to make money on short-term swings in prices. Plus, your trading activity has to be continuous.

Investors, by comparison, profit mainly from long-term appreciations and dividends. Their expenses are nondeductible, so the IRS takes extra-special care when it comes to Schedule Cs, since they know any filers are actually investors, not traders. This is why your chances of an audit go up.

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