6 Tax Red Flags That Could Get You Audited
Nobody wants to be audited. But about 1 in 150 of us will experience some type of audit in our lifetime. That’s the bad news. The good news is that if you avoid these six potential red flags, you may be able reduce your chances of getting the dreaded audit notice in the future.
1. You don’t disclose all of your income.
This one sounds like common sense, but you’d be surprised. The IRS gets copies of your W-2’s, 1099’s that report your interest, dividends, capital gains and losses from investments (sales of stocks, bonds, mutual funds, etc), compensation paid to you as a self-employed independent contractor, and other income items. Make sure you collect all of your statements from work, investments, etc., because they sure will. Also, when it comes to taxes, it’s smart to measure twice, cut once. Make sure that someone (whether it’s you or your accountant) double checks your return.
2. You have a big mouth.
Never, never brag (especially on social media) that you pulled a fast one on the IRS. In today’s economic climate, the IRS does more trolling than ever before—especially on social websites like Facebook and Twitter. Not to mention the fact that whistleblowers can earn some significant rewards (15% to 30% by filing form 211) for turning in cheats.
3. The dreaded home office tax deduction.
The home office tax deduction has been a long-standing audit red flag item. The IRS recently created a limited safe harbor that allows taxpayers to take a deduction of $5 per square foot up to 300 square feet. Remember to ask yourself whether an office is being provided for you by your employer even if you work a good amount out of the home—better safe than sorry.
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4. You have an unincorporated business (Schedule C Sole Proprietor).
If your tax return includes Schedule C, which is used by sole proprietors and self-employed independent contractors to report their business income and deductions, you have a higher likelihood of being audited by the IRS. Schedule C filers are more likely to file an incorrect tax return, as many are self-prepared, and they tend to under-report income and over-report deductions. Also, as a Schedule C filer reporting operating losses over a period of years, the IRS could consider your business a hobby if you haven’t turned a profit over three of the last five years. If this happens, you could have your deductions disallowed by the IRS.
5. You make too much money.
Sounds like a high class problem, right? But the statistics back it up. As you make more money, you have a higher percentage chance of facing an audit, especially business owners that have an LLC or an S Corporation. Here are the odds:
- Those making $200,000 to $500,000 approximately 1 in 50
- Those making $500,000 to $1,000,000 approximately 1 in 25
- Those making $1,000,000 to $5,000,000 approximately 1 in 10
- Those making $5,000,000 to $10,000,000 approximately 1 in 5
- Those making $10,000,000 and above approximately 1 in 3
6. You were too charitable.
Donating is great, but you run a higher risk when you claim above $500 in non-cash charitable donations. To mitigate this risk, be sure you file form 8283 and have very clear documentation. A good website to use for basic item valuations is www.satruck.com (see the Donation Value Guide).
Part of the auditing process is highly randomized, so you may not be able to avoid an audit regardless of how careful you are. But using these tips can help shrink your risk!
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