the irs will receive millions of tax returns this year from individuals, married couples and businesses. so you would think that your chances of being audited are slim. think again. the irs has set up a filter system where certain items on your tax return will trigger an alert that something may not be right with the information. while you may be on the up-and-up, you will still be audited if your return has any of these 10 red flags.
1: out-of-proportion income figures
be aware that the irs has taken great pains to know what the median average wage is for the job you have. if your income figures are out of proportion to how much other people in the same industry are making, the irs will want to know why. best way to avoid this audit: be honest with how much you really make or you will be on the irs radar every time you file your returns.
2: self-employment deductions
being self-employed means you can work at home in your pajamas. yet it also means that you could be audited faster than others because you may claim deductions and business expenses that are not related to your self-employment. best way to avoid this audit: never mix personal expenses and business deductions. report all taxable income and file the correct tax forms.
3: tip and cash earners
it is harder to keep track of tips and cash payments that have to be reported on your tax forms. certain professions that accept cash and tips will more frequently be audited by the irs. best way to avoid this audit: the irs agent will ask specific questions that will tell them when someone is underreporting their cash income, according to kiplinger. answer truthfully and keep meticulous accounting records.
4: home office deduction
the home office deduction is another red flag to the irs because they have stringent guidelines on what qualifies as a home office. people like to include their entire home for the deduction. best way to avoid this audit: your home office must be exclusively used for business purposes and not for other activities. read irs publication 587 to ensure you qualify for the home office deduction, according to the irs.
5: business losses for self-employed or sole proprietor tax payers
business losses for the first one or two years are common when you are self-employed or a sole proprietor. but if you are still claiming losses 3 years later after being in business for 5 years, the irs will begin to wonder if you really own a business or if you are just writing off a hobby to get more deductions, according to learnvest. best way to avoid this audit: have all your business documentation so you can prove that you made a profit.
6: making an income of $200k or higher
it is just a fact of life that the more money you make, the more likely you will be audited by the irs. people will make more mistakes or underreport the amount they made on tricky tax returns when they are in higher income brackets. also, the irs will get a higher payoff when auditing these returns. best way to avoid this audit: ensure that you report all income and have the forms to back it up. also, use the right tax forms and fill in all applicable fields.
7: failing to report all taxable income
it is easy to misplace a decimal point or add an extra number to throw off all your income figures. yet if your tax returns don’t match the w-2 form or 1099 form sent to the irs by your employer, the irs will audit you, according to cbs news. best way to avoid this audit: if there is an error on your w-2 or 1099, have the employer send the irs the corrected information.
8: taking higher-than-average deductions
it is easy to try to claim as many deductions as you can to get a bigger tax refund. but if the deductions are too large in comparison to the amount you earn (such as claiming $17,000 in expenses but only reporting $23,000 in gross income) an audit will happen. best way to avoid this audit: if you can claim the deduction and have the documents to back it up, then put it on the return. don’t take a deduction that you can’t prove.
9: taking eitc tax credits
the earned income tax credit (eitc) is a subsidy given to low-income working families. you may be audited if you receive this tax credit but make more than the eligibility requirements. best way to avoid this audit: only take the credit if you qualify as a low-income family or low-income individual.
10: taking large charitable deductions
giving to charities will always be a worthy endeavor. yet if your charitable deductions seem abnormally large, especially in comparison to how much income you earn, someone from the irs will come knocking on your door. best way to avoid this audit: have all your documentation and receipts available if you give more than $250. you will need to file form 8283 for charitable deductions of $500 or more.