Your lavish spending on Black Friday, Cyber Monday and the holidays could land you in trouble with the Internal Revenue Service (IRS). Extravagant purchases may indicate to the IRS that you have not fully reported all of your income on your tax returns.
IRS agents can perform examinations to determine whether your extravagant lifestyle is inline with your reported income. If the IRS spots you driving that new Tesla you purchase for your wife as a gift, you could be subject to an IRS examination or even worse, a criminal investigation.
Your tax returns may be flagged for an audit for any number of reasons or even just randomly selected. The IRS uses computer programs to analyze and rate tax returns. The higher your score, the greater the chance that your return will be selected for an audit. While we do not know exactly how the IRS computer programs work, we do know that the Discriminant Function (DIF) and the Unreported Income Discriminate Information Function (UIDIF) search for things such as total positive income and high-expense/low-income ratio. Other factors that can increase your risk of being audited include being self-employed or earning more than $1 million in income.
If the IRS suspects you are living beyond your means, they may conduct a lifestyle examination. In a typical lifestyle examination, the IRS uses the networth method of proof to determine whether the increase in your networth over time is supported by your reported income. Under the Housing Assistance Tax Act of 2008, the IRS has the right to review credit card and digital payments for use in audits. Additionally, the IRS may subpoena your credit card and bank statements when conducting a criminal investigation into tax fraud or tax evasion.
As you get ready to go on a shopping spree this holiday, keep in mind that your lavish spending could could result in a tax audit by the IRS or even a criminal charges.
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