5 IRS Red Flags That Could Lead to an Audit
In these times of a struggling economy, massive Government spending, and a skyrocketing national deficit, you can be sure that the IRS will work hard to collect every penny of taxes they're owed. The IRS estimates that the gap between what is owed by taxpayers, and what the IRS collects each year, is in the neighborhood of $400 billion. This could lead to higher scrutiny of individual tax returns, and an increasing number of IRS audits.
The IRS keeps their criteria for auditing tax returns a closely guarded secret, but there are a few things that clearly increase the odds of having to explain yourself to the taxman.
Having a High Level of IncomeIt's a problem most Americans would love to have, but earning a 6-figure salary increases your odds of catching unwanted attention from the auditors. There seems to be two reasons for this. First of all, the more you earn, the more valuable your tax reporting error is to the Government. After all, and error of a few hundred dollars is much less interesting than and error of tens of thousands of dollars. Secondly, higher income earners tend to own businesses, rental properties, investment portfolios, and other items that create a more complicated tax return. The more complicated the return, the bigger chance of a mistake.
While having a high level of taxable income sends up a red flag, most folks will gladly take their chances with this one.
Home Office DeductionsIf you own a home-based business as either your primary source of income, or a supplement to your regular salary, tread carefully when taking home office tax deductions. You're well within your rights to take self-employment deductions, but make sure every deduction you claim is both legitimate and documented, because this will increase your odds of being audited. Resist any temptation to squeeze in a few personal expenses, and if you write off a percentage of your home expenses as business square footage, be conservative, be well documented, and be ready to answer questions.
High Level of Charitable DonationsThe rules of thumb used to say that you could deduct $500 for charity without any documentation, and not worry. This no longer holds true. The IRS requires that all charitable donations be accompanied by written verification from either the charity, or your bank. If you donate more than 10% of your income, you should be commended for your generosity, but you should also be ready to prove it to an auditor.
Another important note for charitable contributions is that if you're making a non-cash donation of property (such as a car) and the value is over $5,000, you're required to have an appraisal done on the property to back-up your tax claim.
Unusually High ExpensesSteep expenses are another factor that will send a tax return under the magnifying glass of an auditor. If anything seems excessive, the IRS will take a closer look. If you have unusual expenses, such as very high medical bills, it's always a good idea to send an explanation along with your return.
Filing a Sloppy ReturnA carelessly filed return that is either incomplete or hard to read will invite extra attention. An organized return prepared through e-file eliminates the possibility that a number is illegible, and tax preparation software reminds you to fill in each box, and checks for errors. The IRS feels that messy tax returns are more likely to contain errors. Even a simple oversight means that an auditor has to examine the return in order to correct the mistake. Don't overlook the details. Be neat, and be precise. Also, make sure you sign your return. If you fail to sign it, the IRS will take a closer look.
As long as you report all of your income, have proper documentation to prove your deductions, fill out your forms correctly, and calculate your taxes correctly; you don't need to fear an audit. However, it's still a good idea to avoid sending any red flags to the IRS.
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