Most taxpayers fear an audit by the IRS. Auditors are quite thorough, combing through your financial records with a fine tooth comb to ensure that you have paid everything that you owe and have not made claims that are not valid. While the IRS performs random audits each year, and you cannot avoid these, you can take steps to avoid triggering one through your return by avoiding common pitfalls.
1. Home Business Office
If you work from home, you have the right to claim a deduction for a portion of your home’s utilities, provided you have a home business. However, the IRS is very strict as to what is considered a home office. The area that you claim has to be used almost exclusively for your business needs. If you work from your living room which also houses your TV and your children’s toys, you cannot claim this area. Be very careful when claiming this deduction.
2. Job Expenses
You can make some deductions for expenditures you make for work, such as purchasing required equipment or uniforms. However, this can flag an audit because many tax payers abuse it. Make sure that your job expenses meet all of the qualifications. First, they must exceed 2 percent of your adjusted gross income. They also must be “ordinary and necessary.” Finally, they cannot be items that were reimbursable by your employer.
3. Rental Losses
Be careful about claiming rental losses if you do not fully understand the tax code. If you have rental losses, you are far better off utilizing the help of a CPA, because filing these incorrectly can leave you with an audit flag.
4. Schedule C Losses
Schedule C is the form used to calculate losses from business endeavors. Taxpayers who are traditionally employed and also claim losses on Form Schedule C have a higher likelihood of being audited, because the IRS will want to see that they are not classifying their hobbies as a business in order to get a tax return.
5. Unreported Income
If you receive a 1099 or any other tax form, that form has also been sent to the IRS. Failure to report that income on your tax return will most likely flag an audit, because they computers that analyze the returns will know that you did not claim the income. Do not forget about interest on savings accounts, even if it is small, or dividends you receive. This income is reported to the IRS, so you also need to claim it.
6. High Itemized Deductions
If your itemized deductions are high compared to others in a similar income bracket, the IRS is going to take a closer look at your return and may request an audit. You can ask your CPA to compare your deductions to averages for those in your income bracket to help protect yourself.
7. Charitable Donations
Charitable donations, particularly of non-cash assets, put you under higher scrutiny by the IRS because many have abused these potential deductions. In general, if your contribution is disproportionate to your income, you are at higher risk of an audit. To protect yourself from this possibility, make sure you thoroughly document everything if you are going to donate to charity.
8. Suspicious Income
If you make significantly low or significantly high income, especially in comparison to others in your profession, you are in a higher risk of being audited. The IRS is five times as likely to audit those who make over $100,000 a year, and they will also flag accounts that appear far smaller than they should be for the line of work the tax payer is in.
9. Sloppy Returns
If your return is sloppy, it will come under scrutiny. If the IRS finds a discrepancy between your Federal and your state returns, for instance, they are more likely to audit you. Similarly, math errors or missing information on your return can trigger problems. To protect yourself from this, use a good tax preparer or tax preparation software.
10. Drastic Income Changes
If you notice a huge change in your income from one year to the next, make sure you didn’t forget to list something somewhere. The IRS knows that this is not common, and will investigate your return. If the change is legitimate, you may want to include an explanation with your return.
Disclaimer: This article is provided as-is and not to be construed as legal advice. You should contact a qualified CPA or attorney to discuss your individual tax matters.
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