Tax season is upon us, which means many people are scrambling to collect their paperwork and prepare a tax return that will maximize their refund without triggering an IRS tax audit.
Audits can happen for a number of different reasons. Sometimes, they result from intentional fraud or deception on the part of the taxpayer. In other cases, the taxpayer simply made an honest mistake or failed to provide sufficient proof.
These days, most tax returns are filtered through an IRS system that can flag a return for a potential audit. Below are some of the biggest “red flags:”
Underreporting income: The IRS checks the income listed on a tax return against the filer’s 1099 and W-2. A discrepancy is almost sure to lead to an audit.
Large charitable deductions: The IRS has data showing the average charitable donations made by people in different income brackets. If you have made significant charitable donations, make sure you have the documentation to back those up.
High income: Filers with income over $100,000 are more likely to face an audit than taxpayers earning less than that amount.
Larger than average deductions: Just as with charitable donations, the IRS keeps data on the average deductions for filers of varying income levels. If you are claiming significant deductions – for example, for costly unreimbursed medical procedures – make sure you have proof of your expenses.
Home office deduction: Historically, this has been one of the most frequently “misclaimed” deductions. As a result, the IRS often applies extra scrutiny to home office deductions.
Claiming a car for business use: Many people tend to overestimate the percentage of car usage related to business purposes. If your number seems high, the IRS may want to investigate further.
Large cash transactions: The IRS tends to assume that cash-heavy businesses like car washes, bars, hair salons and restaurants keep some money off the books. Without good records, you may find yourself the subject of a costly audit.
IRS audits are stressful, certainly, but they are manageable if you have the right help. If you get an audit notice, talk to an experienced tax attorney right away.
Source: CBS Boston, “T’is the Season: IRS Audit Red Flags,” Dee Lee, Feb. 22, 2012.