IRS Audit Red Flags

These things may raise the red flags at the IRS that lead to an audit of your return

While the IRS keeps its criteria for who gets audited and who doesn’t a closely guarded secret there are a few things you may want to think about before filing your tax return this year. First, the Internal Revenue Service has increased its enforcement budget which means that tax returns come under closer scrutiny than ever before. Poor advice, tax fraud or even an honest mistake has always been a worry for the millions of Americans filing their taxes each year and for good reason. We can’t tell you exactly what it takes to escape an audit but think about double checking your return this year before filing. These are some of the most important things to consider:

Home Office Deductions

You can almost guarantee that taking the home office deduction is going to raise suspicions. The rules may have been relaxed in 1999 but they are still complex and are limited to only a few employees. Make sure you read and understand the IRS Publication 587, Business Use of Your Home, if you intend to deduct expenses related to operating a home office. Don’t hesitate to take the home-based office deduction if you meet the requirements but don’t be surprised if the IRS contacts you because of it.

Image of a red flag with IRS symbol

Excessive Self-Employment Deductions

Filing Schedule C (profit or loss from a business) could signficantly increase your chances of being audited. This may seem unfair but the IRS is well aware of the fact that many self-employed people hide income and deduct personal expenses by claiming that they are business related. If the IRS thinks that your business expenses relative to your business are unusual then it may be more likely that you are audited. Schedule C filings are estimated to account for up to 20% of all unpaid taxes. Don’t think that IRS will be fooled if you try to claim every day expenses like food and gasoline. These deductions may very well be questioned and you had better be able to explain them.

Inflated Charitable Contributions

Donating to non-profit charities can be a win-win for you and the organization you donate to but being too generous could attract the attention of the IRS. Donating an unusually large chunk of your annual earnings may be a noble and legitimate thing to do but your reasons for doing so may interest IRS investigators. Don’t let this stop you from donating to your favorite charity but make sure that you’ve filled out all necessary forms, keep receipts ready and have explanations ready.

Donating your Car to Charity

Car donations are also being looked at closely since so many people have inflated their values. Remember, you are only allowed to deduct a vehicles fair market value that takes into account its condition and mileage. If the car you are donating has a value in excess of $5,000 then you must obtain a written appraisal to back up your claim. Make sure the estimate and form 8283, Noncash Charitable Contributions, are attached to your return.

High Income

The IRS audited 221,000 Americans making over $100,000 last year, twice the number audited in 2001. If you earn a high income your chances of being audited by the Internal Revenue Service just went up. One of the reasons the IRS targets people in higher tax brackets is that they are more likely to recover unpaid taxes from these individuals. In November of 2005 the IRS Commissioner stated that coverage of high income earners was still too low despite the large increase in audits. Earning over $100,000 a year may not guarantee an audit but the mere fact that you did raises your tax audit odds.

Avoid Simple Errors

Check your math before filing your return. This may be the easiest way to avoid and audit. Double check those Social Security numbers while you’re at it. The IRS these numbers to check whether more than one person is claiming a child. An incorrect Social Security number on your W-2 can also lead to an audit since it will be flagged as “not processible.”

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