Tax Audit Red Flags

As tax day nears…. taxpayers around the country are in a panic. Some because they’re not ready for April 15. Others because they’re deathly afraid of being audited. Here are some common audit red flags to ponder.

The IRS purposely doesn’t definitively say what things make you more likely to be audited.
Since our tax system relies on voluntary reporting of income (i.e. you volunteer your tax information to the IRS and tell them how much you owe), the IRS uses the fear of audits to scare people into being honest. But tax preparers can see patterns in the IRS audits, so that’s how we come up with these lists of red flags.

  • Income over $1 million – If you make a lot of money, you’re more likely to get audited. It’s simple math. There’s more to be collected from you, and in terms of raw dollars, your errors (or lies) are likely much bigger. The IRS stands to collect more from you than the little guys, so they’re more likely to come after you. (And statistics released by the IRS prove that you’re audited more often.)
  • Home office – Many taxpayers wonder if the risk surrounding home office deductions is real or made up. I’ll suggest it’s real. And there are two very good reasons why. First, the IRS is well aware that many taxpayers claiming the deduction don’t meet all the requirements. Either they’re not using the space exclusively for an office, or they really don’t have an office at all, or they’re cheating on the expenses they allocate to the office. The other reason the home office is a red flag… the IRS knows that small business owners are at a higher risk of incorrectly reporting their income than a regular employee. An employee has a W-2 as proof of income. On the other hand, a business owner is left to report whatever numbers are deemed correct. Therefore, small business owners in general have a more risky tax situation, and are therefore more likely to be audited.

More tomorrow!

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