That audit could have been avoided by paying attention to IRS red flags. Image: bark/Flickr/CC BY
Only about 1 percent of all Americans will face a tax audit any given year. Some audits are selected completely at random, but most are in response to red flags. Avoiding these red flags will do much to reduce your chances of becoming part of “the 1 percent.”
Charitable deductions
Excessively large charity contributions are one of the biggest red flags for the IRS.
Alan Straus, a tax attorney and certified public accountant in New York, said:
“It is really unusual for people to give more than 10 percent of their income. Ten percent is an extremely large number. The average is really about 2 percent.”
Donating property is especially tricky. As a rule of thumb, property should be valued between one and 30 percent of its original value. Overestimating can bring the tax man running. A professional appraisal is never a bad idea on high-ticket items.
Not reporting all income
It seems obvious, but all too often a 1099 or a W-2 can get overlooked by a person with multiple income sources in the madness of tax preparation. The IRS has them all, and they will notice if one or more is not included in your return.
Self-employed deductions
Self-employed taxpayers, especially those claiming home office expenses, are a huge target for auditors. To qualify to take these deductions, a home office has to be a dedicated space and the primary base of operations for the business. Even then, trying to claim cable bills, home meals or family Internet plans is pushing it.
Meal and entertainment deductions
To legitimately qualify for these deductions, detailed records must be kept for every business-related entertainment or meal expense. These records must include the amount spent, who attended, the legitimate business purpose and the topics discussed.
Cash-heavy businesses
Cash-intensive businesses, such as taxi cabs, hair salons, car washes and the like, are always at a higher risk for audit. To avoid problems, be scrupulous in taking deductions and always back them up with as much documentation as possible.
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The company vehicle
The company vehicle is another red flag for the federal tax inspectors. The percentage a car is used for business purposes is documented as part of depreciation expenses on form 4562. Claiming 100 percent of your vehicle expenses will shine a spotlight on your return and is an especially bad idea if you can show no other vehicle for non-business use.
Sloppy errors
Careless, sloppy or incomplete returns are an open invitation to auditors and are the easiest red flags to avoid. Even a hand-written return can cause raised eyebrows. Whenever possible, returns should be prepared on a computer.
Illegible or sloppy handwriting, unsigned returns and simple math errors are among the most common sloppy errors to cause red flags. All of them can be eliminated by carefully checking returns before sending them. If a return does not look up to snuff, simply get clean copies of all the forms and copy them over.
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