Avoiding a Tax Audit: 15 Red Flags to Avoid

by | Apr 21, 2016 | Personal Finance 101 | 0 comments

There may be 50 ways to leave your lover, but there are dozens of ways to gain the unwelcome attention of the IRS. The IRS conducts thousands of audits every year; from this, it develops an understanding of which taxpayer characteristics are likely to put more money in Uncle Sam’s pocket. Here are 15 red flags that could cause the IRS to audit you.

  1. High income: you can’t get blood out of a stone. In 2011, 56% of audits targeted people with incomes of over $1 million per year; 65% targeted people with incomes of over $100,000 per year.
  2. A big increase in income
  3. Low income: People who report incomes of under $25,000 per year are audited more than people who make more.
  4. Claiming the Earned Income Tax Credit: Some taxpayers abuse this credit for low-income families.
  5. Small income and big business deductions: A business that generates a lot of revenue but only a small profit may get extra attention from the IRS.
  6. Hobbies in place of businesses: Some people list their unprofitable hobbies as businesses in order to deduct the loss against their other income.
  7. Large home office deductions: A home office must be used regularly and exclusively for business.
  8. Unreported taxable income: if a company sends a 1099 that you don’t report, the IRS may think that you have failed to report other items as well.
  9. Itemized deductions: You must have evidence in order to include an itemized deduction on your return.
  10. Large charitable donations, especially of goods: was the 1980s-era TV set that you gave to a homeless shelter really worth $500?
  11. Offshore credit cards: Some people try to use offshore credit cards to spend money without bringing it into the US.
  12. Large casualty losses: Can you really prove that a whale ate your boat? Can you really show how much the boat was worth?
  13. Mathematical errors: One mathematical error may lead the IRS to think that there are more.
  14. Income other than wages: Many sole proprietors do some work in cash and fail to report it.
  15. Unusually large business meal & entertainment deductions: It can be tempting to write off all of your restaurant purchases, but this practice can hurt you in the end.

IRS audits can be painful and expensive, even if you have done nothing wrong. Although there is nothing wrong with taking every deduction that you can document, some tax characteristics can raise your risk of an audit. This article is not tax advice. For more information, please contact us.