Are You at Risk of an IRS Audit?Posted on April 4th, 2016
Marianne Kern, CPA
Kern & Associates CPA, P.A.
Now that tax season is almost over, are you wondering if the return you just filed, or are about to file, could be at risk of an IRS audit? The IRS’s main goal in audits is to close the “tax gap” which is the difference between what the IRS expects to collect and what it actually collects. While it’s true that some returns are randomly selected for examination, most of the time the IRS has a reason for plucking a form 1040 out of the pile. Audits are generally triggered by a specific item or pattern of behavior on your tax return. The following is a brief checklist of items or behaviors that might trigger an audit.
Failing to Include a Form 1099 Income
Over 60% of under-reported individual income tax is related to business and self-employment income. The IRS matches forms 1099 in their records to the amounts on your return, so make sure those are correct.
Inflating Home Office Deductions
If you use part of your home for business, you’re entitled to deduct the related costs as a home office deduction. To qualify for the home office deduction, the IRS says you must use the part of your home attributable to business “exclusively and regularly for your trade or business.” Your home office must be your actual office and not used for other purposes. Most of your business deductions based on the size of your home office but do not overstate the size of your office.
Citing Too Many Losses on a Schedule C
Filing a Schedule C isn’t generally enough to trigger an audit, but taxpayers who file a Schedule C may be statistically more likely to face an audit because there is a temptation to overstate losses. The IRS assumes you’re in business to make money. Filing a loss year after year might make the IRS question your losses.
Claiming High Charitable Deductions
Charitable deductions are one of the most common deductions claimed on a personal income tax return. More than 90% of taxpayers who opt to itemize claim charitable deductions. Be sure to document your donations.
Using Too Many Round Numbers
Your tax return isn’t intended to be an estimate. You should report your actual items of income and losses, not approximations. If the IRS sees too many numbers that look like guesses, they may ask you for supporting documentation.
Reporting Rental Real Estate Losses When you Don’t Materially Participate
The IRS considers all rental real estate activities that aren’t performed by real estate professionals to be passive activities. That means expenses associated with rental real estate activities will be deductible only to the extent of rental income. However, if you’re considered to be in the business of renting real property because of your active involvement, you may be entitled to deduct rental real estate losses in full.
Citing Too Many Business-Related Deductions
A bona fide business expense must be both “ordinary and necessary in carrying on any trade or business.” If you have a lot of deductions that seem a bit out of the ordinary for your trade or business, you may call attention to your return. To claim a business-related deduction there should be a clear connection between your expenses and your business in order to take the deduction. Don’t try to make something fit that doesn’t qualify, and keep excellent records.
You should not pay more in taxes than you have to so don’t be afraid to take legitimate deductions on your return. But be careful, however, to report all income and expenses properly and keep good records.