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8 Things That Rise Your Chances of Being Audited

  • It is possible that multiple factors, rather than just one, will result in an audit. The IRS has a system that is similar to a point system. The more risk factors you have on your return, the more likely you are to be audited. The following are the top IRS audit triggers to avoid.

    1. Home office deduction 

    You may be eligible for a home office deduction if you set aside and regularly use a portion of your home for your business. However, you must adhere to the IRS guidelines.

    You should take this deduction if you qualify and have good records, including photos. Employees who work from home can no longer deduct home office expenses as a result of the tax reform legislation passed by Congress last year. It can also serve as an audit trigger.

    2. 1099 income 

    If you are an independent contractor, clients who pay you $600 or more will send you a form 1099-MISC. Your 1099s will not be an audit trigger if you worked for one or two large clients, according to Weston; it's when you have a lot of small clients that the IRS suspects you may not have reported everything.

    Keep good records and report all of your income, whether you received a 1099 or not. When they audit you, the first thing they will ask for is your bank statements. Maintaining a separate account for your business's income and expenses will assist you in the event of a tax audit.

    3. Self-employment 

    With regard to self-employment income, there are two opposing issues. The first category includes those who work in the gig economy and have never previously filed a Schedule C, or "profit or loss from business" form.

    Many people are unaware that they are in business. Many gig workers fail to keep the business records required to defend against an audit.

    Those who deduct expenses from a business that the IRS considers a hobby is on the other end of the spectrum. If your company isn't profitable and you're claiming a tax deduction for it, that's a red flag.

    4. Charitable contributions 

    The IRS has strict rules regarding charitable contribution deductions, particularly when donating property rather than cash. If you don't have photos or other proof that the desk you gave to charity was a mint condition zinc Eames, the IRS may only allow you to deduct the much lower yard-sale price.

    5. Mileage deduction 

    If you drive your own car for work or business, you may be able to deduct a per-mile amount to cover your driving expenses. If you drive a lot for charity, moving, or medical reasons, you can deduct a small amount for each mile you drive.

    The mileage deduction is a high-risk area for fraud and is heavily audited. But don't be concerned. The beauty of technology is that your GPS history can be used as audit support. Your mileage can be calculated using your business records.

    6. Rental income 

    Rental income, particularly if you also work a 9-to-5 job, will raise your audit score. Because of the limitations on how much you can take as a loss, that is a highly audited area.

    7. High earnings 

    The higher your income, the more likely it is that you will be audited. The IRS stands to gain more if they catch a wealthy individual in error. Audits are not exempt from low-income earners, especially if they claim a refundable credit, such as the earned income tax credit.

    8. Estimated numbers 

    Any time there are even numbers on your return, that's a red flag. The IRS will be suspicious if your office supplies cost exactly $500 or if your mileage is a round number.

    To protect yourself from a potential audit, don't risk losing your receipts. Have you digitized your receipts? Save six years of receipts because the IRS can go back that far in some cases. If they believe there's a fraud, they can go back to the day you filed your first tax return.

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