If you’re an American who pays taxes, at tax time and throughout the year, you need to be aware of what may trigger audits from the Internal Revenue Service (IRS). First, though, be aware that in general, your chances of being audited are only about 1.5% if you’re just an average taxpayer. There are, however, some so-called “red flags” that may increase the odds that you’ll be picked for an audit. According to Kiplinger’s Personal Finance magazine, the following are the red flags that will cause the IRS to scrutinize you a little more closely.
First, if you make a lot of money, you’re more likely to get an audit. The threshold is $200,000. Allegedly, this past year, 15% of all of those who are millionaires and richer had tax audits. This percentage is about ten times higher than the general population.
Next, if the IRS believes that you had taxable income that you neglected to report. Remember, even if you think that your W-2 or 1099s might be incorrect, go ahead and file, then work out the discrepancies later. The worst thing you can do is to simply not report it. If you have received government grants, whether they’re grants for your small business, grants for education, grants for home improvements, be sure to check with a trusted tax professional as to what you should count as income.
Third, claiming a huge amount of charitable or other types of deductions will warrant a closer look if the IRS thinks they’re out of line with what others in your income bracket tend to deduct. Don’t let that stop you from being generous with your giving, but just get receipts for your donations and keep good records.
Claiming a home office deduction also increases your likelihood of being audited. If you legitimately use a home office, then be sure to only claim the percentage of space you use and the amount of time you use it for business.
Similarly, if you claim 100% business use of a vehicle, this will raise some eyebrows. It’s pretty rare that a vehicle you own would have absolutely no personal use. The key here is to keep daily logs of your mileage with dates, times, and details on the vehicle usage.
Another potential pitfall for a small business owner of independent contractor are deductions for business meals, travel, and entertainment. Again, keep good records and be prepared to justify these as legitimate business expenses.
Other various red flags are claiming rental losses, writing off a loss for a hobby, operating a business that is almost all cash-based, failing to report a foreign bank account, and engaging is currency transactions. What these all have in common is that they are transactions that lend themselves to not being well documented and possibly subject to abuse.
The bottom line is to report income and deductions factually, keep good records, and seek the advice of a competent tax professional. (I’m not a tax professional, so just use what you’ve read here as the basis of deciding if you need to consult with a knowledgeable tax expert.)