Red Flags that Might Trigger an IRS Tax Audit Part 2 of 2

Continued from our prior blog post.

The Most Common IRS Red Flags that could trigger a Tax Audit:

16. Claiming 100% business use of a vehicle – When you depreciate a car, you have to list on IRS Form 4562 of what percentage of its use during the year that you claim (testify on a Federal form by your signature) was for business. Claiming 100% business use of an automobile, especially if you have no other vehicles available for use, can be a red flag; so being conservative here is advisable.

17. Claiming job expenses – If you work for a company, you are entitled to take a deduction for expenditures you made during that tax year directly connected with the performance of your job. To do this, the expenses must meet three conditions: (1) the total of all claimed expenses must exceed 2% of your Adjusted Gross Income, (2) the expenditures must be both “ordinary and necessary,” and (3) the expenses were not reimbursed or reimbursable by your employer. Many private and some public school teachers fall into this category.

18. Discrepancies between state and Federal tax returns — Government tax agencies cross reference information, so always be sure that the information on both your state and Federal returns is the same.

19. You have been audited before – Once you’ve been audited, you may remain on the “suspect list” for a few years. File a normal and conservative returns after an audit and be sure to keep your records.

20. Your tax preparer is on the IRS target list – When selecting a tax preparer, find a full-time professional and insist they go conservative on any deductions or claims that might be sketchy, out of the norm, hard to document, etc. Some tax preparers will claim you’ll get a big refund, only to also raise flags getting you an IRS audit too. Check references. Check your return. Be conservative in your claims.

21. Claiming large charitable deductions – The IRS has tables and “normal ratios” of what average charitable donations are for people in your similar demographic and similar income level. If your charitable deductions are greater than 10% of your income, make certain that your records are in order and that an audit would not cause you other troubles. You are allowed to give as much as you wish, but keep records and know that this could be a red flag with the IRS.

22. Guessing about when a stock (or investment) was purchased or sold – the IRS knows keeps track of these dates, so if yours do not line-up, they look to see if other items aren’t quite right either.

23. Rounding up or down — The IRS wants specifics, so recording multiple round numbers on a return indicate a sloppy taxpayer, it may also indicate too many estimates of figures.

24. You’ve missed filing your tax returns in the past – A taxpayer that’s flagged as a “non-filer” increases their chances for an audit
25. Claiming rental losses – This is red flag area that is complicated. Taxpayers who purchase income property, must weigh their primary occupation against their actual role in the management of their property – to determine how much can be legally written-off in rental losses each year on an investor’s tax return. If you show income from a primary job and still want to claim rental-property losses, it is best to get a tax professional’s input for the appropriate way to handle this.

26. Writing off a loss for a “hobby activity” – You may have some income from a hobby that is also considered “fun” such as boat, for example, and you file a Schedule C with large losses against a “hobby business” you will likely raise a red flag.
27. Large casualty losses – The loss of your home and personal property by fire, tornado, hurricane, flood, earthquake, theft or other trauma must be considered against the IRS requirements for casualty, disaster, and theft losses before filing.

28. Targeted industries – The IRS selects a group of targeted professions each year. It may be by chance that you fall into a focused demographic targeted for audit.

29. Common math errors – It’s best to double check your figures before you submit your return, avoid round figures like 1000, 3000, etc.. If you mess up on your math, the IRS is going to wonder what else you were careless with.

30. Handwriting your return – It’s so easy to fill out a return electronically now, that handwritten returns are noteworthy just because they aren’t computer generated. Your best bet is to file electronically.

When in doubt, it might be a good idea to review your proposed tax return options with the help of a qualified CPA, IRS enrolled agent, or a tax lawyer.

We are here to help you file your taxes correctly and avoid an audit. We’ll discuss the possible issues and provide solutions. The initial consultation is free! To discuss your situation, please contact our tax firm for a free tax consultation at 877-788-2937.

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