Red Flags to the IRS – Audit Statistics
Making too much money
The more money you make increases your likelihood of being audited. People who make $200,000 or more tend to be audited more than individuals who make less than $200,000. Meanwhile, if one reports one million or more they have a one-in-eight chance of having their return audited. Obviously, everyone wants to make more money, but keep in mind that the more money you make the more likely you will be audited.
Failing to report all taxable income
The IRS receives copies of all 1099s and W-2’s, so it is important that one reports all required income on their return. IRS computers are very good at matching the numbers on the forms with the income shown on their return. Numbers or information that does not match will send up a red flag to the IRS. If you receive a 1099 reflecting an incorrect amount it is important that the issuer files a correct form with the IRS.
Large charitable deductions
Charitable contributions can be a great write-off. However, if someone’s charitable deductions are disproportionately large compared to their income, it could increase their chance of being audited. The reason that this happens is the computers of the IRS know the standard charitable donation for each income. It is also important to keep all receipts and documents in regards to contributions.
Home office deduction claims
The IRS is alerted to returns that claim home office write-offs. It is important to keep in mind the qualifications for a home office. The space that is used for the home office must be used regularly and exclusively as your main place of business. Guest bedrooms for example can be difficult to claim because they must be only used for work. That being said home offices can be a great write –off, but just make sure that you are making proper use of the space.
Rental loss claims
Usually, the passive loss rules prevent the deduction of rental real estate losses. However, there are two exceptions. One, if you rent your own property yourself you can deduct up to $25,000 of loss against your other income. This $25,000 allowance disappears as one’s income exceeds $150,000. The second exception applies to real estate professionals. They must spend 50% of their working hours or 750 hours each year dedicated to the real estate profession. These individuals can write off their losses without limitation. It is important to keep in mind the IRS looks for rental estate losses, especially from individuals who claim to be real estate professionals.
Deducting business travel, meals, and entertainment
Business travel, meals, and entertainment can be huge deductions to the self-employed. But it also raises a red flag for IRS agents who know that the self-employed sometimes claim excessive deductions. The IRS looks at both higher-grossing sole proprietorship and smaller ones.
Large deductions for meals, travel and entertainment are usually alarms for an audit. To qualify for meal or entertainment deductions, you must keep accurate records that document each expense, the amount, the place, the people attending, the business reason and the nature of the meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, your deduction will be a problem.
100% use of a vehicle for business
This is another red flag for the IRS. It is very unusual for an individual to use a car 100% for business purposes, especially if that person only has one car! The IRS knows this and is always on the lookout for this matter. If you do have a car that you use for business purposes it is important to keep detailed and immaculate records.
Writing off a loss for a hobby activity
Another sure chance of an audit is if you have wage income and file a Schedule C with large losses. Then, if the loss-generating activity sounds like a hobby — horse breeding, car racing and such — the IRS pays even more attention. Agents are specially trained notice those who improperly deduct hobby losses.
You need to report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. (expo.aspe.org) For you to claim a loss, your activity must be entered into and conducted with the reasonable expectation of making a profit So make sure you run your activity in a businesslike manner and can provide supporting documents for all expenses.
Having a cash business
Small business that exchanges mainly cash, such as, car washes, bars, taxis, restaurants, etc, tend to be targets for IRS auditors. It has been shown that businesses that receive cash are less likely to report their correct taxable income. Therefore these tend to be easy targets for audits.
Hiding or not reporting a foreign bank account
The IRS is grossly interested in people with foreign bank accounts. Keep in mind, failure to report an offshore bank account is a top priority for the IRS and can lead to extreme penalties.
Engaging in currency transactions
If you have large cash purchases or deposits you are more likely to be audited by the IRS. These seem to be areas that the IRS wants to keep an eye on in terms of unreported income.
Taking higher than-average-deductions
If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. Although if you have the proper documentation for your deduction, don’t be afraid to claim it. There’s no reason to ever pay the IRS more tax than you actually owe.
If you have a concern in regards to an audit or any other tax question(s), our tax settlement professionals can help you. For more information about our services, visit us today at www.professionaltaxresolution.com. With over 16 years in the business of resolving tax debt, we have a thorough understanding of tax law together with the experience to know which option will be the best fit for your specific set of circumstances.
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