IRS Audit Triggers: 10 Red Flags To Avoid

In 2017, the IRS received more than 152 million tax returns from individuals, married couples, and businesses. And these numbers are predicted to increase for 2018. With so many people filing, you’d think it’s highly unlikely to get audited. However, you should think again. Since the IRS began allowing e-filing, many people have been filing taxes themselves, which means they’re more likely to make mistakes.

This is one important reason why the IRS set up a filter system to pay specific attention to certain parts of your tax return and flag them if they seem suspicious or potentially inaccurate. You’ll have a much better chance of avoiding an audit if you keep these 10 IRS audit triggers in mind when you file your taxes.

1: Out-Of-Proportion Income

The IRS has extensive information about what the median average wage for your job should be. If your income figures are out of proportion to how much other people in the same industry are making, this is one of the most common IRS audit triggers, and the IRS will want to know more. To help avoid this audit: be honest with how much you really make and how you make it. Otherwise, you’ll be on the IRS’ radar every time you file a tax return from now on.

2: Self-Employment Deductions

Being self-employed, you have the luxury of working at home in your pajamas if you want. However, you could also be audited faster than others because you may claim deductions and business expenses that are not related to your self-employment. To help avoid this audit: keep personal expenses and business deductions separate, report all taxable income correctly, and file the correct tax forms to claim legitimate deductions. A free, comprehensive tax organizer can be of great help here.

3: Tip And Cash Earners

It is admittedly more difficult to keep track of tips and cash payments than checks or direct deposits. The IRS knows this and holds these types of earners to a higher standard. The IRS audits professions more frequently that accept cash and tips, such as restaurants and wait staff. To help avoid this audit: report all your income, not just what you think is traceable via credit card receipts or checks. If you trigger this type of audit, an IRS agent will ask specific questions that will tell them if you’re underreporting your cash income. Answer truthfully and keep accurate, detailed accounting records.

4: Home Office Deductions

The IRS has very stringent guidelines on what qualifies as a home office, so the home office deduction is a definite red flag on your tax return. For this deduction to be legitimate, there must be a room separate from the rest of the house that cannot be used for other reasons. (It can’t be your living room, for example.) Sometimes people try to include their entire home for the deduction, which is a major no-no. To help avoid this audit: have a separate room for your home office used exclusively for business purposes and not for other activities. Read IRS publication 587 to ensure you qualify for a home office deduction.

5: Business Losses For The Self-Employed/Business Owners

When you’re self-employed or a sole proprietor, business losses are common for the first one or two years. However, if you’re still claiming losses after being in business for five or more years, the IRS will question if you own a real business or if you’re just writing off a hobby to get more deductions. To help avoid this audit: document all your business expenses to prove you did indeed lose money.

6: Making $200,000 Or More A Year

The more you make, the more likely the IRS will audit you. They know taxpayers will likely make more mistakes or be tempted to underreport their income on tricky tax returns when they’re in higher income brackets. Also, the IRS gets a larger payoff when auditing these higher-income returns. To help avoid this audit: report all income and keep documentation to prove it. Also, use the correct tax forms and fill in all relevant fields.

7: Not Reporting All Taxable Income

Misplacing a decimal point or adding an extra number is a simple mistake, but it can throw off all your income figures. If your tax returns don’t match the W-2 form or 1099 form submitted by your employer, the IRS is much more likely to audit you. To help avoid this audit: if an error occurs on your W-2 or 1099, have the employer send the IRS the correct information.

8: Taking Higher-Than-Average Deductions

Most taxpayers should claim as many deductions as possible to get a bigger tax refund or owe less taxes. If you can claim the deduction and have the documents to back it up, then put it on the return. However, if the deductions are too large in comparison to the amount earned — for example, claiming $17,000 in expenses but only reporting $23,000 in gross income — you’re likely to trigger an audit. To help avoid this audit: don’t take a deduction you can’t prove.

9: Claiming EITC Tax Credits

The Earned Income Tax Credit (EITC) is a subsidy given to low-income working families. If you receive this tax credit but make more than the eligibility requirements, you may be audited. The IRS has cracked down on this credit specifically, so anyone claiming the EITC will have to wait until after February 15 to receive any part of their tax return. This delay allows the IRS to confirm income levels with W-2 forms before issuing the refund. To help avoid this audit: take the credit only if you qualify as a low-income family or low-income individual.

10: Large Charitable Deductions

Since giving to charities is a worthy endeavor, our tax laws reward it. But if your charitable deductions seem unusually large in comparison to your income, the IRS may come knocking on your door. To help avoid this audit: if you donated more than $250 last year, keep all related documentation and receipts on file. If you made donations of $500 or more, be sure to file form 8283.

Have a question? Contact Robert Hartman.

Your comments are always welcome!

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