Transcription
So, the IRS just got $80 billion. And no, the money wasn't spent on answering phones faster. A massive portion of that $80 billion went straight into technology. We're talking artificial intelligence, data analytics, and automated enforcement systems, which means that audits are going to work very differently than they did in recent years. And if you think this only affects the billionaires or the guys flying private, you're making a very expensive mistake. You might want to watch this all the way through because the little guy, people like you and I are actually the easiest target for the IRS's new system.
Look, as a tax strategist at keepmost.com, I'm going to give you the biggest IRS red flags to avoid. And if you get any value out of this video, give it a thumbs up so more people see it. Now, let's look at how audits actually work. You ready? Check this out.
You see, the old system relied on randomness. An auditor sat at a desk, drank bad coffee. It was human, which means it was slow. But the new IRS system relies on AI, artificial intelligence, and that AI is looking for patterns. See, AI doesn't ask, "Did this person do something illegal?" It asks, "Does this person look statistically different from everyone else in their lane?" If the answer is yes, your return gets flagged. Now, they call this the diff score, discriminate function. It's basically a math grade. If your grade is too far away from the class average, you get an audit.
So, let's look at eight red flags you need to be aware of so you can protect yourself.
Red flag number one is the lifestyle versus paper discrepancy. See, this is the most common one, and you don't need a Ferrari to trigger it. So, let me explain what I mean. Maybe you made $73,000 last year. That's what you reported your income to be, but the IRS looks at your lifestyle data. They see you're paying a $2,500 mortgage. You have a $600 car payment. You're spending $1,500 a month on groceries and eating out. And that whole thing adds up. So $73,000 a year is roughly $4,800 a month after tax. Now, if your fixed bills and lifestyle spending are 5,500, the math there doesn't work. The IRS system looks at your cost of living index for your specific zip code. And if your reported income can't even cover your basic utilities and rent, well, the AI flags it. And yes, social media is part of that data set. We can confirm that the IRS is now cross-referencing what you report to the life you live on Instagram and Facebook. What I'm saying here is that the AI is cross referencing public data at scale. Property records, car registration data, credit card debt levels, all of it.
Okay. Red flag number two, the home office check. Check this out. Every entrepreneur wants the home office deduction. It's a great write-off. But the IRS is getting aggressive here. They aren't just looking at the number you put on paper. They are cross referencing your property tax records and Zillow data. So if you claim a 1,200 sq ft home office, but your house is only 1,800 sq ft, the IRS assumes you're lying. You're telling the government that 66% of your house is exclusively for business. Now, unless you live in a closet and work in the rest of the house, that's a flag. And if you have multiple LLC's and you're claiming a home office for each one, you better have three distinct rooms and enough square footage to make that make sense. You can't double dip the same desk for three different businesses. So, make sure you're using a reasonable size for your home office.
Now, red flag number three, deductions that don't match your lane. You see, every profession has what we call a norm. The IRS isn't just looking at you specifically. They're looking at a data set of a million people who do exactly what you do. They have a standard profile for every profession. If you're a freelance graphic designer, your profile says you'll likely write off hardware, software, and creative assets. If you're a plumber, it's heavy machinery, fuel, and parts. You see, the IRS wants to see consistency here, documentation, logic. And when your write-offs fall outside the industry average, you're standing out. And you might say, Karan, I don't want to blend in with my industry. I want to do something my competitors aren't doing. And to that, I say great. Just make sure you have ample documentation to back it up. And by the way, if you want the master list of tax credits, deductions, and strategies the best CPAs use, but don't tell the public, head to keepmost.com, there are over 90 of them you can use to lower your taxes today.
Now, red flag number four is the loan car vehicle write off. I see this on the internet all the time. Go buy a G Wagon and write the whole thing off with section 179 or bonus depreciation. And I love that deduction, but wait a minute, slow down. If you have one car registered to your name and you claim 100% business use for it, the IRS is going to laugh at you. Do you walk to the grocery store? Do you bike to your kid's soccer game? Do you never ever use that car for a personal errand? You see, the IRS looks at your household. If there's only one car and that car is 100% business, that's a statistical anomaly. They're going to ask you for your mileage log. And if you don't have a thorough log, meaning you tracked it as it happened and not 6 months later in an Excel sheet, they are likely to disqualify the whole depreciation. You'll owe the tax back on the car. So instead, be realistic and use mileage apps to substantiate your business use.
Red flag number five is business versus hobby. You see, losing money in one year is business. We've all been there. Now, losing money three, four, 5 years in a row is different. At some point, the IRS asks, "Is this a legitimate business or just a hobby you're using to lower your tax bill?" Section 183 of the tax code, look it up. It's the hobby loss rule. If you aren't showing a path to profit, you're a target for an audit. Now, you might ask, Karan, why does the IRS care if I'm trying to build something? And here's why. They think you're using a side hustle to subsidize your personal life. If they decide it's a hobby, they don't say stop, they go back. And by that, they reverse your deductions for the last 3 years. They add penalties. They add interest. So, bulletproof yourself here by showing intent, separate bank accounts, a business plan, marketing.
Okay, red flag number six, the steak dinner trap. Let's talk meals here. The rule is ordinary and necessary and it's 50% deductible right now if it's for a client meeting. If you're a sole proprietor making $60,000 a year and you have $12,000 in meals, the IRS is going to flag you. That's 20% of your gross income spent on eating out. If the IRS sees spending at 7-Eleven, Starbucks, and the local pizza spot every Friday night, that doesn't sound like a business meeting. They're going to look for the names of who you were with and the business purpose. No receipt, no notes, you lose the deduction.
Now, red flag number seven is the STR loophole abuse. You probably heard of the short-term rental loophole. It's hot right now because it allows W2 earners to use real estate depreciation that's normally considered passive. So, if you rent a property for an average of 7 days or less, you can treat the depreciation losses as non-passive. That means you can offset W2 income. But here's the catch. You have to materially participate. And with that, the IRS is now looking at your other jobs. If you work 60 hours a week as a surgeon or engineer and claim you spent 500 hours managing one Airbnb, the math doesn't work. They'll ask for logs. They'll check messages with your cleaning crew. If you can't prove the work, they reclassify the loss as passive. And now that massive write off that you were banking on is gone.
Okay, red flag number eight is the vacation masquerade. Look, I'm going to Hawaii for a conference that lasts 2 hours and writing up the whole 7-day trip. Stop it. The IRS knows this trick. They look at the ratio of business days to personal days, and international travel rules are even stricter. So, the IRS scans for high ticket travel to resort destinations. If you aren't documenting business meetings for the majority of the trip, the travel is considered personal. Airfare disqualified, hotel disqualified, and most people mess this up with no itinerary, no emails, proving meetings. So, if the IRS doesn't see a clean business trail, it assumes a vacation.
Now, luckily, we do have videos on this channel showing how to write off travel the right way. And this year, the IRS isn't focused on catching criminals. They're focused on probability. So, ask yourself this. How much is in your wallet? And can you prove how it got there? The safest position is clean records, separate accounts, logical deductions, and consistency in your story. If you haven't already, watch the video here on how the IRS is going after side hustles. With that, my name is Karan and I'll see you in the next video. Take care.