There is nothing worse then getting that lovely letter from the IRS saying they’d like to audit your books and tax filings. Have you wondered why this happened or what you could have done differently to stop it? In the subsequent list we will look at items that set off 2016 IRS Tax Audit Red Flags. Some of these items you may have done on purpose, while others may be an honest mistake. Either way, you need to know what you can and cannot do in order to avoid an audit. Now the odds of you getting audited these days are extremely slim (less than 1%), but 1 false move or stretching of the numbers will set off 2016 IRS Tax Audit Red Flags and the IRS computers will signal a possibility for fraud. Let’s go through the list one by one and make sure you are fully notified of these items. As always, if you want more in-depth help, please contact your tax professional to guide you through this.
1. Higher Income / Additional Income: Yes you work hard and the goal is to make as much money as you can, but there is a negative to making more money and that is setting off one of the 2016 IRS Tax Audit Red Flags. Just going by the numbers, you have a slightly less than1% chance of being audited with an income of less than $200,000. However, when your income goes above $200,000 your chance of getting audited triples! Even more so, there is almost a 10% chance of being audited if you make more than $1,000,000. Why you may ask, this is because catching an error at a higher income level will result in recovering a higher amount of money on any mistakes/fraud. Another way to get the IRS breathing down your back is claiming hard to document income. If you are filing a substantial amount of income aside from your W2 reported income, you have a chance to hit another of the 2016 IRS Tax Audit Red Flags. In a sense the tax filer is almost guilty until proven innocent. The IRS will get suspicious that since you have a lot of income earned from other ways that you may have “forgot” to include all of it. It may not be fair, but it is the truth of the IRS auditors
2. Forgotten or Unreported Income: Staying along the same lines as income, you must realize that most income no matter it is earned or comes from is typically reported to the IRS. Therefore if you are looking for an audit, just forget to claim income you received notification of. Income can come from 1099s, 1099-DIV, and W2s. If you are wondering how the government will know is the fact they have all reported income attached to your SS# so when you file taxes, it is a quick check. If your income doesn’t line up, prepare to set off another of the 2016 IRS Tax Audit Red Flags.
3. Home Office: You have your own business where you work from home or have the ability to work from home, be VERY careful when compiling your tax returns as you will easily raise another 2016 IRS Tax Audit Red Flags. What this boils down to is that you need to ensure the space in your home that you are claiming as business space is used exclusively for business purposes. Having your laptop in the family theatre room will not allow you to claim the theatre room as business space. Just remember be precise and claim ONLY the space used just for your business.
4. Charitable Donations (Noncash): Let’s face it, most people at some point or another will donate some old clothes or household items, but not necessarily cash. Since cash is traceable, it is easy to incorporate this into your tax return and not have to worry about hitting one of the 2016 IRS Tax Audit Red Flags. However, determining the value of other items that you donate can definitely get you in trouble with the IRS. The guideline used is that you will claim the fair market value of the items you donated, but if you inflate these amounts on your Schedule A, the IRS will get curious and might just pay you a visit. Whenever you are donating items, keep a detailed list and make sure you assign each item a fair market value.
5. Meals and Entertainment: If you own your own business it is almost understood that you will engage in company outing, dinners, and entertainment. Now the problem lies if you are overly aggressive and are claiming excessive amounts of with regards to your tax returns. According to IRS rules, you are only allowed to claim 50% of your business-related meals and entertainment, however, if you claim a large amount, the IRS might feel that you inflated these expenses or claimed 100% of the cost. You also can’t expense “lavish” items and meals and entertainment need to be reasonable. Was there a need for a steak dinner? Sure there is, but not for the 4-hour private yacht charter. This is yet another easy way to signal one of the 2016 IRS Tax Audit Red Flags.
6. Automobile Expenses (Business Use): Staying in the same category of business expenses, another area you can get tripped up in is the over-claiming of business auto expenses. The biggest mistake you can do is claim that your car is used 100% of the time for business. Now this may be possible, but the fact of the matter is you probably use your car on the weekends for personal use. IF you feel you use your car for 90%+ of the time for business you need to document all your trips and odometer readings because the more info the better when trying to avoid the 2016 IRS Tax Audit Red Flags
7. High Itemized Deductions: If you haven’t gotten the point already, you should know that trying to inflate expenses and cheat the IRS will NOT work out for you as eventually you will get caught or grab the interest of an auditor. When your tax return is reviewed by the IRS computers, there are certain limitations and percentages placed on itemized deductions as a percentage of your income. However, if you do have legitimate expenses like medical bills, by all means claim them, just ensure you have all the back-up necessary.
8. Non-Job Related Expenses: This is a prime example of where the IRS can have their cake and eat it too. Let’s say for example you engage in an activity/hobby in your spare time and you can earn money from it. If you get paid more than $600 it is required for you to receive a 1099, however, you may not be able to claim all expenses related to this activity. According to the IRS, in these situations you are only allowed to claim up to the amount of income you earned from the activity.
In conclusion, you can see that there are definitely some activities you can engage in that will trigger the 2016 IRS Tax Audit Red Flags. Do yourself a favor and be honest and make sure you have detailed records of all items revolving around your taxes. There is nothing worse than getting a call or opening a letter from the IRS stating that you have been pulled for an audit. The fun won’t stop here either, if it is found you made some errors, the IRS can also go to historical tax returns and assess damages and penalties from years past. Having a tax professional in your corner is the key to not triggering an audit red flag!