How Charitable Contributions and Hobby Losses Can Trigger An Income Tax Audit

by Bruce Givner on December 1, 2011

In the prior 4 blogs we discussed how sudden large losses, sudden large deductions, omitted income, math errors, sloppy returns and sharply increasing income can all trigger an income tax audit. Here we’ll discus how excessive charitable contributions and hobby losses can also trigger an income tax audit.

Consider this: You made $100,000 in 2010 and you reported $20,000 in charitable contributions. You might very well be charitably inclined, however, that is an extraordinary percentage of your income to give to charity. Perhaps some of those deductions were “in kind,” e.g., gifts of clothing. However, used clothing isn’t worth a whole lot of money. This is the type of deduction that will raise suspicion, unless you are a minister.

Now in this example, you made $100,000 in 2010 and you reported a loss of $50,000 in your business of horse racing. Or a loss of $40,000 in your business of nature photography. Or a loss of $30,000 in your business of being a travel agent. The IRS is not thrilled with activities that are allegedly businesses but have a history of generating nothing but losses. The hobby loss rules are of keen interest to an auditor.

Whether you are a CPA, a professional, or a potential client, contact Givner & Kaye to see how we can help you make more money, save taxes and gain peace of mind over all your estate and asset protection needs. (310) 207-8008

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