When filing your taxes, the last thing you want months or even years later is a letter from the IRS stating you are in line for an audit. As long as you cover your bases with some simple tips mentioned here, you’ll never have to worry about that letter coming in the mail.
Flag #1: Mismatched Accounting
Make sure all taxable income is reported. The IRS gets all copies of 1099’s & W-2’s you receive. A mismatch sends a red flag, and causes IRS computers to spit out a bill. If a 1099 or W-2 is incorrect, make sure to get with the issuer to file a correct form with the IRS.
Flag #2: Charitable Deductions
If your charitable deductions are larger than your income, it raises a red flag. Make sure to get appraisals for valuable property donated, the IRS knows an average deduction for your income level, so anything abnormal could trigger an audit.
Flag #3: Rental Losses
With rental properties becoming all the more common these days, the IRS is cracking down on real estate losses. When the IRS started a real estate professional audit project a few years back, the rules require you to spend more than 50% working hours and 750 or more hours each year materially participating in the property. That is an average of almost 15 hours per week. Keep in mind when renting out your own property, you can deduct up to $25,000 of loss against your other income. The $25,000 phases out if your AGI is over $100,000 and completely cancels out if you exceed $150,000 AGI.
Flag #4: Extra Deductions
Deducting business meals, travel, and entertainment. Any big or excessive deductions could always trigger an audit. The key here is keeping receipts for any business related deductions.
Flag #5: Business Vehicle Claims
Claiming 100% use of a business vehicle. Make sure to keep detailed mileage logs for business use. Also, if claiming the vehicle for business use and using the standard mileage rate, you cannot claim the expenses tied into the vehicle such as maintenance and insurance.
Flag #6: Hobbies
Writing off a loss for a hobby activity. Whether if it was a rough year at the casino or the horse track, you cannot claim these losses on your returns. If luck was on your side, make sure the income is reported.
Flag #7: Home Office
Claiming the home office deduction. Maximum deduction is $1,500. The space must be exclusively used for business. Just make sure you have the room or space and can prove it.
Flag #8: Alimony
Taking an alimony deduction. A mismatch in ex-spouses alimony claims will almost certain trigger an audit. Make sure the amount is what the divorce decree or separation agreement states.
Flag #9: Foreign Accounts
Failing to report a foreign bank account. If the account had more than $10,000 in the previous year at any time, it must be reported.
Flag #10: Cash Transactions
Engaging in currency transactions. Any transaction exceeding $10,000 in cash the IRS keeps reports on. Banks and other institutions file suspicious reports if a suspicious pattern is avoiding the 10k limit. For example, if someone deposits cash amounts of $9,500 one day, and $9,500 the next.
Remember a tax audit is simply an inquiry and may not be serious. However, the feeling of being audited can be stressful. Make sure to keep these tips in mind when filing.
Have you ever been audited? What tips can your provide to avoid triggering an audit?