Don’t risk a tax audit. Four reasons the IRS may flag your return

dmphoto | E+ | Getty Images

Tax season is underway, and there’s been increased scrutiny of the IRS as it starts deploying part of the nearly $80 billion in funding approved for the agency by Congress in August. 

While Treasury Secretary Janet Yellen has said goals include boosting customer service and improving technology, critics have warned the new funding will spark an uptick in IRS audits. 

“People are scared to death of the IRS,” said Karla Dennis, an enrolled agent and founder of Karla Dennis and Associates. “They don’t understand how the system works, and so they’re extremely fearful of audits.” 

More from Smart Tax Planning:

Here’s a look at more tax-planning news.

The IRS audited 3.8 out of every 1,000 returns, or 0.38%, during the fiscal year 2022, down from 0.41% in 2021, according to a recent report from Syracuse University’s Transactional Records Access Clearinghouse.

While IRS audits have been rare, experts say certain moves are more likely to trigger an exam.

4 red flags for an IRS audit

The statute of limitations for an IRS audit is typically three years, with the clock starting once you file, explained John Apisa, a CPA and partner at PKF O’Connor Davies LLP. But there’s no time limit when the agency is pursuing tax fraud. 

Generally, the agency uses software to compare each return to others with similar income, assigning a numeric score to each one, with higher numbers more likely to trigger an audit.

Some of the red flags that may trigger an audit include:

1. Excessive credits or deductions compared to income 

For example, your return may get flagged if you made $100,000 and claimed $70,000 in charitable deductions.

2. Missing income

Your return must reflect what’s been reported by employers and financial institutions, Apisa said, such as Form 1099-NEC for contract work or Form 1099-B for investment earnings. Wait to file until you have all your documentation in hand, and check to make sure what you entered matches what’s on the forms.

“You have to be careful, even with the simpler stuff,” he said. 

Here's how to cope with higher rates

3. Refundable credits

The IRS also reviews refundable tax credits more carefully since filers can still receive the tax credit with zero balance due.

While audits have declined overall, the drop is lower for filers claiming the earned income tax credit, a tax break for low to moderate earners, which has contributed to higher audit rates among Black Americans.

4. Round numbers

Deductions with rounded expenses may raise eyebrows, said Preeti Shah, a certified financial planner and CPA at Enlight Financial in Hamilton, New Jersey.

For example, if a business owner lists exactly $5,000 for advertising, $3,000 for legal expenses and $2,000 for support, “the IRS knows you’re just winging it,” she said.   

“Round numbers are a dead giveaway,” Apisa added.

How to protect yourself from a possible audit

While taxpayers may be fearful of an audit, experts say the best protection is staying organized by saving receipts and records to show proof, if needed. “You’re guilty until proven innocent,” Shah said.

And if you’re missing a receipt, copious records may provide a narrative to back up your position, Dennis said. “Document, document, document,” she added. 

Ford’s CEO needs to deliver by next quarter, or we’re moving on

Ford CEO Jim Farley at the company’s Dearborn, Michigan, plant where it’s building the electric F-150 Lightning on April 26, 2022.

CNBC | Michael Wayland

Ford Motor (F) CEO Jim Farley said the automakers’ messy fourth quarter was a function of its transition to a new business structure that limited production capacity, combined with poor execution. But we remain disappointed in the results and need to see an increase in profitability to stick with the stock after the next quarter.

Vince McMahon open to leaving WWE if he sells company, CEO says

WWE CEO Nick Khan discusses 'broad range of options' for potential sale

World Wrestling Entertainment Executive Chairman Vince McMahon is open to stepping away from the company “if it’s the right deal,” according to WWE CEO Nick Khan.

Shares of the company closed more than 5% higher Friday.

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McMahon’s potential future involvement in WWE has become an early sticking point in preliminary talks with various buyers, according to people familiar with the matter, who asked not to be named because the discussions are private.

McMahon is WWE’s controlling shareholder. He developed the creative storylines for the professional wrestling league for decades, often taking part in narratives himself. Earlier this year, he stepped down as head of creative, handing the reigns to his son-in-law, former WWE superstar Paul “Triple H” Levesque. Khan took over as sole CEO in January when Levesque’s wife and McMahon’s daughter, Stephanie, stepped down as co-CEO.

“Vince has declared to the board he’s 100% open to transactions where he’s not included in the company moving forward,” Khan said in a CNBC interview Friday.

Vince McMahon attends a press conference at MetLife Stadium on February 16, 2012 in East Rutherford, New Jersey.

Michael N. Todaro | Getty Images

McMahon stepped away from his CEO role in June amid accusations of sexual misconduct from former female WWE employees. A month later, he announced he announced he would retire from the wrestling company he bought from his father over four decades ago. Last month, however, McMahon returned to the board to be directly involved in sale negotiations with potential buyers.

WWE has hired financial advisors to proceed with a sale process, which Khan predicted would last about three months. Khan emphasized WWE could be appealing to a large media company with a streaming platform that could increase subscribers by exclusively owning WWE’s monthly live events, along with its historical library of past matches.

“We feel the marketplace is robust for our product,” Khan said. “It’s in essence it’s own sports league. Someone can buy it and put it on their platform.”

Potential buyers for WWE include Comcast, Netflix, Liberty Media and Endeavor, which already owns UFC.

Khan acknowledged “it’s tough to take control” from McMahon, who has owned and run WWE (previously WWF) for more than 40 years. Still, he reiterated that McMahon would prioritize shareholder value and step away “if it’s the right deal — and we will take a look at all of the factors that make it the right deal.”

Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.

Ford sold most of its Rivian stake last year

RJ Scaringe, Rivian founder and CEO, and Ford Executive Chairman Bill Ford announce a $500 million Ford investment in Rivian.

Source: Ford Motor Co.

DETROIT – Ford Motor liquidated most of its ownership stake last year in electric vehicle maker Rivian Automotive, according to the Detroit automaker’s annual report submitted to the Securities and Exchange Commission on Friday.

Ford sold 91 million shares of the EV startup in 2022, according to the filing. Ford’s sale of the shares was worth about $3 billion in total proceeds, the company said, a substantial gain on its $1.2 billion investment in Rivian.

Ford, as of the end of last year, still owned about 11 million of its initial 101.9 million shares of Rivian. The company declined to comment on plans for the remaining shares, which still made the automaker one of the company’s largest shareholders, according to FactSet. Rivian also declined to comment.

Ford first invested in Rivian in 2019, before the EV maker went public. At the time, the two companies said that Ford would build an electric vehicle based on the “skateboard” platform that now underpins Rivian’s R1T pickup and R1S SUV. Despite former Ford CEO Jim Hackett’s enthusiasm for the deal, those plans never came to fruition.

But as a result of that initial investment, Ford was among the largest stakeholders in the company upon Rivian’s blockbuster IPO in 2021, with a 12% stake.

Ford said that it sold 25.2 million shares of Rivian in the second quarter, for about $700 million in total proceeds. It sold an additional 51.9 million shares during the third quarter for about $1.8 billion, according to earlier filings.

Hackett’s successor, Jim Farley, had made it clear that Ford would likely sell its stake, but it was unclear when the automaker planned to sell the shares and exit Rivian.

Ford unrealized gains/losses were $8.3 billion gain in 2021 and a $968 million loss in 2022, which damaged the automaker’s bottom-line last year.

Shortly after Rivian’s blockbuster IPO in November 2021, shares of the company reached an all-time high of nearly $180 a share during Wall Street’s infatuation with EV startups that led to inflated valuations of early- or pre-revenue companies.

Rivian’s stock is now trading around $20 a share, following several missed targets and a slower-than-expected increase in vehicle production at a plant in Normal, Illinois. The company is valued at about $18 billion.

George Santos office vandalized with graffiti, police say

U.S. Rep. George Santos (R-NY) leaves the Capitol Hill Club as members of the press follow him on January 31, 2023 in Washington, DC.

Alex Wong | Getty Images News | Getty Images

The New York district office of U.S. Rep. George Santos was vandalized with graffiti that spelled out a tri-lingual string of vulgarities against the embattled Republican congressman, police told CNBC on Friday.

Police received a call on Friday morning after the words “Santos is,” followed by the Greek, Mandarin and Spanish words for a scatalogical expletive, were found written on the lawmaker’s Queens-area office in gold spray paint, an NYPD spokesman said.

It was not immediately clear if police had identified any suspects in the incident, which is believed to have occurred sometime between 5 p.m. ET on Thursday and 8:30 a.m. ET on Friday.

“This act of cowardly behavior is beyond unacceptable and compromises the safety of my staff as well as my constituents,” Santos said in a statement sent through his office.

“My staff should never have to worry about entering the workplace, nor constituents who require federal assistance. A report was filed with the NYPD 111th Precinct, and I encourage anyone who may have information to contact them directly,” he said. “I would like to personally thank the NYPD for their commitment to public safety, and for keeping my district staff safe.”

The incident comes as Santos’ brief time in Congress has been plagued by a torrent of bipartisan criticism surrounding his lies on the campaign trail about his personal life and education, along with a laundry list of other scandals.

The freshman lawmaker has vowed to serve out his full two-year term in office, but said this week he won’t serve on any House committees until the many investigations into his campaign and finances have concluded.

China says suspected spy balloon over U.S. skies is a civilian airship

Pentagon tracking suspected Chinese spy balloon over U.S.

Chinese authorities said Friday that a suspected Beijing-operated spy balloon spotted hovering over sensitive U.S. airspace was in fact a civilian airship intended for scientific research.

China’s Foreign Ministry said in a statement that westerly wind had caused the airship to stray into U.S. territory, describing the incident as a result of “force majeure” — or greater force — for which it was not responsible.

“The airship comes from China and is of a civilian nature, used for scientific research such as meteorology,” according to a Google translation of a statement on the foreign ministry’s website.

“Affected by the westerly wind and with limited self-control ability, the airship seriously deviated from the scheduled route,” it said. 

“China regrets that the airship strayed into the United States due to force majeure. China will continue to maintain communication with the US to properly handle the unexpected situation,” it added.

The statement comes hours after Beijing urged Washington to remain “cool-headed” amid its investigation into reports that the balloon had been hovering over sensitive airspace in the northern U.S.

The U.S. accused China on Thursday of operating what it said was a possible surveillance balloon over locations that house nuclear weapons, further escalating tensions between the two superpowers and prompting U.S. Secretary of State Antony Blinken to cancel a scheduled trip to Beijing this weekend.

Foreign Ministry spokesperson Mao Ning said at a press briefing earlier Friday that authorities were still learning about the matter, adding that politicians and the public should withhold judgment “before we have a clear understanding of the facts.”

We hope relevant parties would handle the matter in a cool-headed way.

Mao Ning

spokesperson, China’s Foreign Ministry

“We have noticed relevant reports and are learning about this matter. What I want to emphasize is that speculation and conjecture are not conducive to a proper settlement of the matter before the matter is clarified,” Mao said, via an NBC translation.

“China is a responsible country, and we act in accordance with international law. We have no intention to violate other countries’ sovereignty and airspace,” Mao said, according to a Sky News translation.

“As I said, we are gathering and verifying the facts. We hope relevant parties would handle the matter in a cool-headed way,” she added.

Spotted over Montana

Footage of what appears to be a high-altitude balloon was captured by an eyewitness over Billings, Montana, on Wednesday. CNBC or NBC News could not independently verify the footage or identify the flying object.

It reportedly flew over the Aleutian Islands, through Canada, and into Montana. A senior defense official said the balloon is still over the U.S. but declined to say where it is now. 

After the sighting, Secretary of Defense Lloyd Austin convened a meeting of senior military and defense leaders and other combatant commanders to review the threat profile of the stratospheric balloon and brief President Joe Biden on possible responses.

Such options included shooting down the balloon. That action was ultimately dismissed because of the potential risk to safety and security of people on the ground from the possible debris field.

A senior defense official said authorities are continuing to monitor the balloon closely and will take “all necessary steps” to protect against foreign intelligence collection of sensitive information.

“Currently we assess that this balloon has limited additive value from an intelligence collection perspective over and above what the PRC can do through other means,” the official said. “Nevertheless, we are taking all necessary steps to protect against foreign intelligence collection of sensitive information.”

The balloon does not pose a threat to civil aviation because of its altitude, the official added.

Blinken postpones Beijing visit

Sell some shares in this bull market

Jim Cramer on why Tyson Foods' conference call will be a must-listen

CNBC’s Jim Cramer on Friday advised investors to ring the register on some of their positions to take advantage of the bull market. 

“I don’t know if we can continue this week’s bizarrely bullish behavior, but it’s worth sticking around and … you can trim a bit of some stock that you’re up a lot,” he said

Stocks fell on Friday after a strong January jobs report renewed fears that the Federal Reserve will continue hiking interest rates. The S&P 500 and Nasdaq Composite still managed to end the week on the positive side, with the tech-heavy index notching its fifth consecutive winning week.

Cramer also reviewed next week’s slate of earnings. All estimates for earnings, revenue and economic data are courtesy of FactSet.

Monday: Tyson Foods, Simon Property Group

Tyson Foods

  • Q1 2023 earnings release at 7:30 a.m. ET; conference call at 9 a.m. ET
  • Projected EPS: $1.31
  • Projected revenue: $13.51 billion

Cramer said the conference call should give insight into the state of food inflation at grocery stores.

Simon Property Group

  • Q4 2022 earnings release at 4:05 p.m. ET; conference call at 5 p.m. ET
  • Projected EPS: $3.15
  • Projected revenue: $1.29 billion

“They may pull a rabbit out of a hat” despite it being a tough time for companies in the office property business, he said.

Tuesday: Chipotle Mexican Grill, Enphase Energy

Chipotle Mexican Grill

  • Q4 2022 earnings release at 4:10 p.m. ET; conference call at 4:30 p.m. ET
  • Projected EPS: $8.91
  • Projected revenue: $2.23 billion

Cramer said he expects the quarter to be phenomenal given the company’s plan to hire 15,000 restaurant workers ahead of the busy spring months.

Enphase Energy

  • Q4 2022 earnings at 4:05 p.m. ET; conference call at 4:30 p.m. ET
  • Projected EPS: $1.27
  • Projected revenue: $707 million

“I always say the same thing — if you believe that solar can be even bigger than it is now, then Enphase is the right stock for you,” he said.

Wednesday: CVS Health, Disney

CVS Health

  • Q4 2022 earnings release at 6:30 a.m. ET; conference call at 8 a.m. ET
  • Projected EPS: $1.92
  • Projected revenue: $76.33 billion

Cramer said that he’s curious why the company’s stock has become “a real bow-wow.”

Disney

  • Q1 2023 earnings release at 4:05 p.m. ET; conference call at 4:30 p.m. ET
  • Projected EPS: 79 cents
  • Projected revenue: $23.44 billion

He predicted that Disney’s performance will improve now that CEO Bob Iger is back at the company’s helm.

Thursday: PepsiCo, PayPal

PepsiCo

  • Q4 2022 earnings release at 6 a.m. ET; conference call at 8:15 a.m. ET
  • Projected EPS: $1.65
  • Projected revenue: $26.84 billion

“I actually think they will deliver good numbers on Thursday, but if we have a growth hangover it might not matter to the market,” he said.

PayPal

  • Q4 2022 earnings release at 4:15 p.m. ET; conference call at 5 p.m. ET
  • Projected EPS: $1.20
  • Projected revenue: $7.39 billion

“Who needs PayPal when Apple Pay is built into your phone?” he said.

Friday: Enbridge, Newell Brands

Enbridge

  • Q4 2022 earnings release before the opening bell; conference call at 9 a.m. ET
  • Projected EPS: 54 cents
  • Projected revenue: $10 billion

Cramer said he wants to hear the company talk about where the price of natural gas is headed.

Newell Brands

  • Q4 2022 earnings release at 6 a.m. ET; conference call at 8:30 a.m. ET
  • Projected EPS: 11 cents
  • Projected revenue: $2.23 billion

The company had a “compelling” turnaround, according to Cramer.

Disclaimer: Cramer’s Charitable Trust owns shares of Apple and Disney.

Cramer's game plan for the trading week of Feb. 6

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Musk, Tesla not liable in securities class action suit

Tesla CEO Elon Musk and his security detail depart the company’s local office in Washington, January 27, 2023.

Jonathan Ernst | Reuters

Elon Musk and Tesla were found not liable by a jury in a San Francisco federal court on Friday in a class action securities fraud trial stemming from tweets Musk made in 2018.

The Tesla, SpaceX and Twitter CEO was sued by Tesla shareholders over a series of tweets he wrote in Aug. 2018 saying he had “funding secured” to take the automaker private for $420 per share, and that “investor support” for such a deal was “confirmed.” Trading in Tesla was halted after his tweets, and its share price remained volatile for weeks.

Jurors deliberated for less than two hours before reading their verdict. “We are disappointed with the verdict and considering next steps,” said Nicholas Porritt, partner at Levi & Korsinski, the firm representing the shareholders in the class action.

“I am deeply appreciative of the jury’s unanimous finding,” Musk wrote on Twitter.

“He doesn’t think ahead of time in that rushed moment that this could be interpreted differently and what it means to him,” Musk’s attorney told the jury earlier on Friday. “In that moment he didn’t think, ‘how could my words be interpreted differently by you than it means to me.'”

“You have to assess this in context – he’s considering taking it private and the issue is will it actually take it forward,” Musk’s attorney said. “No fraud has ever been built on the back of a consideration.”

Musk’s lead counsel did not immediately respond to requests for comment.

The shareholders in the certified class action lawsuit included a mix of stock and options buyers who allege that Musk’s tweets were reckless and false, and that relying on his statements to make decisions about when to buy or sell cost them significant amounts of money.

Musk later claimed that he had a verbal commitment from Saudi Arabia’s sovereign wealth fund, and thought funding would come through at his proposed price based on a handshake. However, the deal never materialized.

During the course of this trial, Musk also said he would have sold shares of SpaceX to finance a going private deal for Tesla, as well as taking funds from the Saudi Public Investment Fund.

Nasdaq notches five-week streak: Longest since November 2021

Tech stocks on display at the Nasdaq.

Peter Kramer | CNBC

The Nasdaq just wrapped up its fifth straight week of gains, jumping 3.3% over the last five days. It’s the longest weekly winning streak for the tech-laden index since a stretch that ended in November 2021. Coming off its worst year since 2008, the Nasdaq is up 15% to start 2023.

The last time tech stocks enjoyed a rally this long, investors were gearing up for electric carmaker Rivian’s blockbuster IPO, the U.S. economy was closing out its strongest year for growth since 1984, and the Nasdaq was trading at a record.

This time around, there’s far less champagne popping. Cost cuts have replaced growth on Wall Street’s checklist, and tech executives are being celebrated for efficiency over innovation. The IPO market is dead. Layoffs are abundant.

Earnings reports were the story of the week, with results landing from many of the world’s most valuable tech companies. But the numbers, for the most part, weren’t good.

Apple missed estimates for the first time since 2016, Facebook parent Meta recorded a third straight quarter of declining revenue, Google‘s core advertising business shrank, and Amazon closed out its weakest year for growth in its 25-year history as a public company.

While investors had mixed reactions to the individual reports, all four stocks closed the week with solid gains, as did Microsoft, which reported earnings the prior week and issued lackluster guidance in projecting revenue growth this quarter of only about 3%.

Cost control is king

Big Tech earnings don't look compelling enough to buy, says Stephanie Link

Zuckerberg acknowledged that the times are changing. From the year of its IPO in 2012 through 2021, the company grew between 22% and 58% a year. But in 2022 revenue fell 1%, and analysts expect growth of only 5% in 2023, according to Refinitiv.

On the earnings call, Zuckerberg said he doesn’t expect declines to continue, “but I also don’t think it’s going to go back to the way it was before.” Meta announced in November the elimination of 11,000 jobs, or 13% of its workforce.

Link said the reason Meta’s stock got such a big bounce after earnings was because “expectations were so low and the valuation was so compelling.” The stock lost almost two-thirds of its value last year, far more than its mega-cap peers.

Navigating ‘a very difficult environment’

Watch CNBC's full interview with Neuberger Berman's Dan Flax

Amazon CEO Andy Jassy, who succeeded Jeff Bezos in mid-2021, took the unusual step of joining the earnings call with analysts Thursday after his company issued a weaker-than-expected forecast for the first quarter. In January, Amazon began layoffs, which are expected to result in the loss of more than 18,000 jobs.

“Given this last quarter was the end of my first full year in this role and given some of the unusual parts in the economy and our business, I thought this might be a good one to join,” Jassy said on the call.

Managing expenses has become a big theme for Amazon, which expanded rapidly during the pandemic and subsequently admitted that it hired too many people during that period.

“We’re working really hard to streamline our costs,” Jassy said.

Alphabet is also in downsizing mode. The company announced last month that it’s slashing 12,000 jobs. Its revenue miss for the fourth quarter included disappointing sales at YouTube from a pullback in ad spending and weakness in the cloud division as businesses tighten their belts.

Ruth Porat, Alphabet’s finance chief, told CNBC’s Deirdre Bosa that the company is meaningfully slowing the pace of hiring in an effort to deliver long-term profitable growth.

Alphabet shares ended the week up 5.4% even after giving up some of their gains during Friday’s sell-off. The stock is now up 19% for the year.

Ruth Porat, Alphabet CFO, at the WEF in Davos, Switzerland on May 23rd, 2022. 

Adam Galica | CNBC

Should the Nasdaq continue its upward trend and notch a sixth week of gains, it would match the longest rally since a stretch that ended in January 2020, just before the Covid pandemic hit the U.S.

Investors will now turn to earnings reports from smaller companies. Some of the names they’ll hear from next week include Pinterest, Robinhood, Affirm and Cloudflare.

Another area in tech that flourished this week was the semiconductor space. Similar to the consumer tech companies, there wasn’t much by way of growth to excite Wall Street.

AMD on Tuesday beat on sales and profit but guided analysts to a 10% year-over-year decline in revenue for the current quarter. Intel, AMD’s primary competitor, reported a disastrous quarter last week and projected a 40% decline in sales in the March quarter.

Still, AMD jumped 14% for the week and Intel rose almost 8%. Texas Instruments and Nvidia also notched nice gains.

The semiconductor industry is dealing with a glut of extra parts at PC and server makers and falling prices for components such as memory and central processors. But after a miserable year in 2022, the stocks are rebounding on signs that an easing of Federal Reserve rate increases and lightening inflation numbers will give the companies a boost later this year.

WATCH: Watch CNBC’s full interview with Truist’s Youssef Squali

Watch CNBC's full interview with Truist Securities' Youssef Squali

6 things to know in a ‘juggernaut’ of a job market

Thomas Barwick | Digitalvision | Getty Images

1. Unemployment is at historic lows

The unemployment rate fell to 3.4% in January — the lowest since May 1969. Put another way: The last time the jobless rate was this low, Neil Armstrong hadn’t yet walked on the moon, Bunker said.

In fact, you’d have to go back to October 1953 to find a lower unemployment rate — 3.1%.

The unemployment rate is a single-best labor market indicator for the average American — it offers a holistic look at its strength or weakness and a reliable gauge for potential recession, said Daniel Zhao, lead economist at Glassdoor, a career site.

“The job market is still strong, and workers have opportunities to go out and find a job that’s a better fit for them,” Zhao said.

U.S. employers added 517,000 new jobs in January, handily beating expectations. They added 4.8 million total jobs in 2022, more than twice the roughly 2.3 million average from 2015 to 2019, said Julia Pollak, chief economist at ZipRecruiter.

2. Layoffs are low despite Big Tech

The layoff rate has stayed below its pre-pandemic nadir for 22 straight months, according to Job Openings and Labor Turnover Survey data. Workers filed 183,000 new claims for unemployment insurance last week — well below the roughly 245,000 average from 2015 to 2019, according to Labor Department data.

“That is just knock-your-socks-off low,” Zandi said of unemployment claims.

Businesses are reluctant to lay off workers and the labor market is strong enough to rapidly absorb people who do lose their jobs, Zandi said.

Tech jobs also account for a small share of the U.S. workforce: about 4% of total employment in 2020, according to a Deloitte report published in 2021.

Watch CNBC's full discussion on the January jobs report

3. The ‘great resignation’ chugs along

Workers are still quitting their jobs in historically elevated numbers.

Most workers who quit do so for new jobs; they don’t leave the workforce altogether. Voluntary departures are therefore a proxy for worker confidence — they’re optimistic about their chances of finding a better job elsewhere, economists said.

4. Hiring has moderated

5. Wage growth is high but cooling

6. The labor market is ‘out of balance’