Red Flags for IRS Audits
Every taxpayer’s biggest fear is getting the dreaded IRS Audit Notice in the mail. Although reporting the following do not guarantee that you will be audited, they are items that the IRS tends to evaluate for audit purposes:
- Failure to report taxable income that has been reported to the government. This will typically cause a notice, but can cause a full blown audit if there is significant information missing.
- Claiming large charitable contributions on Schedule A relative to your total income is a major red flag. If you are a wonderful philanthropist that contributes a significant portion of your income to charities, be sure to keep excellent documentation and records to support the donations, such as receipts and letters with corresponding check stubs and credit card statements. So, in the event you do get audited, you have proof to support the amount on your return.
- Many expenses trigger IRS audits:
- Home Office Deduction if you have an office outside the home. Since the requirements are difficult to meet to have the office being strictly used for business, this is a continuous red flag.
- Large deductions for businesses meals, entertainment, and travel in comparison to related revenue can trigger an audit as well. This is another item where documentation is key.
- Vehicle deductions that seem very high. Be sure to keep a log book of appointments and other business related miles to have adequate documentation in the instance you do get audited.
- A primarily cash collections business, such as hairstylists, bars, restaurants, etc. This IRS has strict audit guidelines that are followed for these businesses, since it is so easy to not report cash income.
- Another large trigger is the failure to report a foreign bank account. If the IRS discovers an offshore account that was not reported, it is almost a guaranteed audit of the rest of your return.
- Claiming unusually high Schedule A deductions, similar to the charitable contributions. Just be sure to have adequate documentation to support in the deductions claimed.
- Schedule D has also been an IRS trigger lately. For people who buy and sell frequently during the year and claim large losses, they need to have proper proof of the basis for these sales.
- Last but not least, simple math errors can be the trigger of an audit.
A great way to diminish your chance of an audit is to hire an accounting firm with a great reputation to prepare your return. They have the knowledge and ability to defend your return in the case of an audit or notice, and are aware of all these pitfalls as well as common mistakes and errors.