Over 36 Years of Experience handling tax controversies & tax disputes

What increases a taxpayer's audit chances?

Taxpayers may be at higher risk of an audit if they claim home office deductions and charitable contributions out of line with their income.

The good news first: A Massachusetts taxpayer's chances of being audited by the IRS do not reach even 1 percent. Furthermore, even if someone is audited, it is possible to persuade the IRS that no fraud was involved.

Now for the not-so-good news: Some returns raise red flags, even if they are for perfectly legitimate claims. Here is a look at some of these scenarios.

Home-office deduction

A home-office deduction can be a red flag because some taxpayers interpret "home office" liberally. While IRS requirements specify that the office must be used only for work, the agency knows that quite a few taxpayers use it for other purposes too. Even someone who uses the business office printer to print personal documents is running afoul of regulations. More egregious violations run along the lines of using the office as a bedroom and having only a corner desk and computer in it.

Vehicle deductions

Speaking of exclusively using a home office, some people say on their tax returns that they used a vehicle for business 100 percent of the time. That is possible, but for many people, unlikely. (Taxpayers who have more than one vehicle are more likely to get away with making a 100 percent claim.)

Mileage logs are one way to prove that use of a vehicle has been recorded accurately; taxpayers can record business mileage use and compare it to total miles at the end of the year.

Strange-looking business expenses

Some taxpayers take family vacations and call everything incurred as a business expense. Likewise, if the owner of a small bookstore claims $15,000 worth of business lunches, that may raise eyebrows. On the other hand, if the person's job is wealth manager, that $15,000 could be more in line of what is expected in the position.

Charitable donations

People at each income level tend to give certain amounts of money to charity. So, someone in a lower income bracket who donates at a rate equivalent to someone in a high bracket may be at heightened risk of audit. Taxpayers should keep all supporting evidence such as property appraisals and file any necessary forms such as perhaps Form 8283.

It is possible for the conclusions of an audit to be reconsidered. For example, a taxpayer may have moved and never gotten a notice in the first place that an audit was taking place.

However, whether taxpayers in Massachusetts have already gone through an audit or are about to deal with one, an attorney can be of great help. Many know how to deal with the IRS and what the agency looks for when it audits tax returns.