Had a great year last year and suddenly enjoyed a surge in income? You could have a target on your back for an IRS audit. While getting audited is no fun, you can survive!
The key to remember is you need to have solid documentation to back up any claims you make about your overall financial picture, particularly your deductions.
Here are some red flags likely to attract increased IRS audit attention
Are you doing your own taxes? We have put together a list of things that will get you flagged by the IRS this tax season.
1. You claim a home office deduction
You need to have a dedicated space in your home that is only used for business to take advantage of this deduction. Doing so lets you prorate some household expenses such as utility bills, homeowner’s association fees and more on a fractional basis. You have to figure out exactly how much square footage is dedicated to your business in y our home vs. how much square footage you have in your home at large. Of course, this area is also ripe for abuse! You’ll need to be able to prove the area you’re claiming is separate and exclusive for business use.
2. You give a lot of money to charity
The IRS knows what others who make similar income to you tend to give, and they will question you if you’re claiming too much. Again, the key is to have accurate and complete documentation to prove you’ve made the donation and to prove the value of the donation if it’s non-monetary. But even then, there’s something of a surprise factor because of how some donations play the car donation card. In general, one of the least scrutinized ways to make a donation is with good old fashioned pen and paper. As USA TODAY notes, “Gifts by check are hard to falsify.”
3. You deduct unreimbursed business expenses
Unreimbursed business expenses are only deductible beyond two percent of your adjusted gross income, and most workers already get reimbursed by their employers for such out-of-pocket expenses. But if you don’t get that reimbursement, things like dues, license fees, subscriptions to trade journals, tools and supplies, and specialty uniforms are all legitimately deductible. The gray area here is when you get into deductions for not-allowable like commuting costs and everyday work clothes. Again, the IRS knows what is outside normal bounds based on your income and will question you if you’re too far out of the norm.
4. You use digital currencies
The IRS will target those with incomes above $200,000. You have a 1 in 37 chance of being audited.
6. Not reporting taxable income
You must report all 1099s and W-2s, even if you believe them to be incorrect. (Deal with the discrepancies after filing.)
7. Claiming day-trading losses on Schedule C
Traders required to file Schedule C, Capital gain income on Schedule D is for investors, that they don’t qualify for write off expenses as home office deduction, etc.
8. Claiming rental losses
Being a landlord is tough, but it’s definitely one route to building long-term wealth. Becoming a landlord starts with finding the right tenant. That way you’re less likely to incur rental losses in the first place!
9. Deducting business meals, travel, and entertainment
10. Claiming 100% business use of a vehicle
Be careful, salespeople! To counter any possible IRS questions, consider keeping a paper log on the dashboard and writing down every mile for work, the date and what it was for. If you do want to claim all the cost for a business expense, be sure you have another vehicle too.
Here are five additional areas that may trip you up with the IRS too!
- Writing off a loss for a hobby
- Taking an alimony deduction
- Running a business where almost all money is in cash
- Not reporting a foreign bank account
- Engaging in currency transactions