12 Tax Audit Red Flags

IRS Audit

A tax audit has to be one of the scariest terms in the in the English language. We’ve all seen the stereotype image of having to go and be questioned by tax authorities, defending our tax returns and it all seems like a scenario out of the Spanish Inquisition.

Have you ever wondered what kinds of things stand out like a sore thumb to prying IRS agents?

A tax audit does not have to be a scary or stressful event after all if you were honest in your return then answering a few questions really shouldn’t matter. That’s why it’s always good to have your returns handled by a professional like a CPA who can help you get the best return possible while making sure everything is being done right and if you do get audited the CPA will go and represent you to the IRS. Guarantor loans can help you to get loan easily from www.buddyloans.com.

In reality the IRS only audits about 1% of all the tax returns for any given year so the chances of you getting picked are pretty slim. Nonetheless these 12 red flags have proven over time to give you a higher chance of getting an audit than not.

1. Making Lots Of Money

We all want to be rich and make millions every year but the reality is the more money you make the more the IRS will be watching to make sure Uncle Sam gets his cut. Nationally the audit rate is 1.11% but those making more than $200,000 per year have an average audit rate of almost 4%. If you’re a big earner and you make over $1 million per year then your audit rate skyrockets to 12.5%.

2. Not Reporting All Taxable Income

Remember your employer and financial institutions all send copies of your W2’s and 1099’s to the IRS. When your return is filed the IRS computers search to match up your reported income and what is on file if things don’t match then your return is flagged for follow up by an IRS agent.

3. Large Charitable Deductions

I’m a huge fan of donating to charities and helping those in need and I think it’s great there is a tax write off for donations. However the IRS knows what the average charitable contributions are for your region and income bracket and when your claims are significantly higher the computers will flag your return for follow up. As long as you have the correct corresponding paper work to validate the deduction than give give give but just know it will raise some flags.

4. Home Office Deduction

This is a deduction the IRS is drawn to like a moth to fire. They have had lots of success in disqualifying the deduction for many people due to the very strict interpretation of “Exclusive Use.” If you qualify for the deduction you are allowed to write off a portion of the expenses associated with having an office at home such as mortgage/rent, property taxes, utilities, insurance, etc… however the space must be for exclusive and regular use for business. Making it very difficult to claim a spare bedroom or living room as an office even if you spend lots of time working in there.

5. Rental Losses

If you have a rental and you actively participate as a landlord then you are able to write off certain losses up to a point or if you spend the majority of your time as a professional in the real estate business then you can write off all losses with no caps. This of course always throws up some flags and the IRS will come searching to see if you really qualify for this deduction. Did you really spend 50% of your working time in real estate? Were you actually actively involved in the property management? These are the kinds of things they will require you to verify.

6. Business Meals, Travel & Entertainment

For the self-employed Schedule C is a great source of tax deductions helping many small businesses; however, it is also one of the first places IRS agents look because it provides just as many opportunities for them to disqualify deductions. They are looking for instances when personal meals or trips were written off as business therefore big deductions for meals and trips are flagged for audit many times. Always make sure you have lots of verifying details and records for any business meals, trips or entertainment that you will write off. When it comes to the IRS the assumption is the deduction does not qualify until you can prove it – guilty until proven innocent.