Preparing for and filing for the current year’s taxes can be a pain for local taxpayers. Actually, not the preparing for the part, but the fear of potentially being audited by the Internal Revenue Service. Although there is no way to know if you are for sure going to get audited or if you can 100% guarantee that you will avoid an audit, these are some red flags you should be aware of and familiar with. If any of these relate to you, just be prepared with all your documentation regardless if you know for a fact you’ll be getting audited or not.
1. Filed a Paper Return
Although these aren’t ranked on a list from what’s the riskiest to least risky, filing a paper return is number one because it is the easiest way to get audited by the IRS. Paper filing your tax return increases the chance of making a math error compared to using online software. Maybe even if there is no error, unreadable or scribbled handwriting can increase the chance for closer review.
2. Claimed a Home-Office Deduction
Using your home as an office is very common among people. Claiming a home-office deduction is the most commonly abused tax deductions used by homeowners who work from home. Normally, claiming a home-office deduction is okay and will not automatically go in the “further inspection” file, but the IRS will look into certain deductions claimed that don’t make sense or seem a little off.
The confusion most people get while claiming a home-office deduction is that you can only get a deduction if that space is solely used for business and business purposes only not if you share the space for work and personal use as well.
When claiming a home-office deduction, make sure to specify that space is only used for business and is separated from personal uses otherwise be prepared for an IRS phone call.
3. You Earn More Than $200,000.00
Contrary to number 3, taxpayers with a high income also draw attention to the IRS. The IRS gets more out of audits of high-income taxpayers so they will focus more on those individuals or couples.
4. Received the EITC and/or Have No Adjusted Gross Income
The IRS estimates that between 21 to 26 percent of Earned Income Tax Credit claims are paid in error, some unintentional and some intentionally disregarding the law. Therefore, low-income taxpayers and/or people with zero adjusted gross income draw attention to the IRS and call for further review.
5. Claim Too Many Business Expense
Businesses can write off anything they buy for their business if it classifies as “ordinary and necessary.” The IRS can question some expenses if they don’t fit that classification. For example, if you are a professional chef and need to buy kitchen utensils or a microwave, that fits the “ordinary and necessary” category.
But, if you are a professional chef and you buy a laptop or office supplies, that is not a necessary expense for your profession. To possibly avoid the IRS questioning your expenses, ask yourself “Do I need this good or service to do my job?” If the answer is yes, then it is ok to write off for expenses.
6. Report a Laundry List of Schedule C Loss
Starting a new business can be risky. Taxpayers have to realize that starting a new business will result in some losses here and there, but in the end, the result is gaining profit. Self-employed taxpayers file for Schedule Cs and report their gains and losses.
A red flag that can trigger an IRS audit is if a new business constantly reports a loss year after year with no profit. The IRS can question the taxpayer’s business and think of it more as a hobby than a business, resulting in the taxpayer to pay any taxes, penalties, or interest.
7. Charitable Contributions are Disproportionately High Compared to Income
Giving charitable contributions allows taxpayers to get a deduction that’s proportionate with his or her highest marginal income tax bracket. Keeping that in mind, a lot of taxpayers get to donate to a good cause as well as get a deduction for it on their returns.
A reason to get audited for making high donations is if the taxpayer donates an unusually large amount of his or her income every year. To be prepared in case if the IRS calls, make sure to always document every donation you make.
8. Numbers are a Little Too Perfect
It is very common for taxpayers to not have or misplace all the appropriate documentation and/or paperwork, so they usually just fill in an estimate rounding up to whole numbers. It is very uncommon if your business expenses total a round number and if the expenses, deductions, and income all are easily subtracted/added equaling to whole numbers as well. If this is something that you do, be prepared in case the IRS comes calling.
9. Failed to Include Form 1099 Income
Failure to report any type of income is a huge red flag for an audit. Make sure to always report any freelance income, dividend income, or interest earned to the IRS because it is automatically reported. Therefore, failure to report something that is automatically reported, your chances of an audit get higher.