10 Big Tax Mistakes That Can Lead to an Audit
The chart below demonstrates a sharp decline in the number of audits since 2010. The IRS audits only 0.5% of all returns as of 2017. That being said, that is still nearly 1 million taxpayers that may face the dreaded audit this coming tax year With that in mind, here is a list of red flags that may draw the attention of the IRS to examining your tax return.
The income reported on your tax return MUST match the income that is reported on W2s and 1099s. It is easier than ever, with technology, for the IRS to access and cross-reference the amount reported on submitted forms with filed returns. Discrepancies are easy to catch and, if they are substantial, might give the IRS good reason to audit.
Earnings that are over $200,000
According the most recent data for 2017 the IRS was four times as likely to audit those with over $200,000 in reported income. With those who made less than $200,000 there were 0.2% of audits among them compared with 0.8% of audits for people with between $200,000 and $1 million and a staggering 4.4% for those making upwards of $1million in reported income.
Significant Changes in Income
Major changes in income whether it is a big drop, or a substantial jump can catch the eye of the IRS and make it more likely for them to take your filing under review.
Reporting Large Amounts of Charitable Deductions
The documentation of charitable giving has fallen under sharper scrutiny in recent years. So too have claims for deductions that seem more than the average for that specific taxpayer’s income. In 2018, the Tax Cuts and Jobs Act’s raising of the standard deduction will likely decrease the number of peoples who itemize their charitable deductions—which could produce the unintended consequence of making questionable deductions stick out even more.
When champion dog breeding, horse racing or dressage are listed as businesses, the IRS sees a red flag. There are specific guidelines in place for what qualifies as a business. When you have a hobby that happens to cost a great deal of money and you are trying to pass it off as a business to recover some of your costs, the IRS will take notice.
Incorrectly Reporting Alimony
Up until December 31, 2018, alimony remains deductible for those who are ordered to pay it. When reporting alimony on your tax filing you’ll need to include the tax payer ID of your former spouse, therefor it is pretty simple for the IRS to see if the claim matches what was paid to the recipient.
Claiming a Home Office
Claiming a home office must meet the requirement and qualifications of the IRS tax code. Many taxpayers, especially with the onset of remote employees and virtual work attendance, the IRS places added scrutiny on those who claim deductions for home office use.
Big Meal and Entertainment Expenses
In the coming years, due to the Tax Cuts and Jobs Act, there will be stricter limits in place on the deductibility of meals and entertainment from businesses. The IRS has a decent handle on what businesses, based on size and type, should spend on meals and expenses each year. Claiming too much of these types of expenses could land you in the audit seat. It is advisable to adhere to the coming standards that the TJCA will be implementing now so that you can be prepared when the law goes into effect.
Cash Based Businesses
Businesses like restaurants, convenience stores, bars and coffee shops are, traditionally, cash based which makes it somewhat easier to hide or misreport income. Given the nature of these businesses the IRS is more likely to examine returns of people who own them.
Audits are not a fun experience and can be quite costly even if the IRS finds that you haven’t committed tax fraud. You have to pay the accounting fees and it can be time-consuming to provide the auditors with all of the documentation they will ask for. The rule of thumb, when it comes to your taxes, is air to the side of caution and stay with the pack. The IRS has technologies in place to detect red flags and pursue them accordingly. The IRS has reduced the number of audits it does each year, but you don’t want to be among the million who do get audited each year.