15 Mar 10 Red Flags That Could Cause You to Be Selected for an IRS Audit
There’s not a lot of time left to complete your tax filing. If you’ve put off returning your tax information, there’s a little good news. We can help you avoid the red flags that lead to audits.
Nobody wants to hear that they’ve been selected for an IRS audit. That word alone can send chills down the spine of most taxpayers. The Internal Revenue Service uses automated and human processes to compare all tax filings to statistical norms. When certain red flags show up on your tax forms, you’re much more likely to be audited. Some of these red flags are inescapable, but others can be avoided.
- Failing to report all income. This red flag is absolutely avoidable. All it requires is honesty and proper accounting. All institutions that have contributed to your income are required to report it to the IRS. Make sure that all income is accounted for and included in your forms.
- Ignoring rules for foreign accounts. If you had a financial interest in or authority over one or more foreign accounts, and the value of those accounts exceeded $10,000 at any time during the calendar year, you are required to file a Report of Foreign Bank and Financial Accounts (FBAR) unless otherwise exempt. Additionally, the Foreign Account Tax Compliance Act requires that Americans must report all foreign assets worth $50,000 or more on the new Form 8938.
- Taking an early payout from a retirement account. If you cash in your IRA, 401(K), or other workplace retirement plan before age 59 and a half, you are subject to a 10% penalty on top of the regular income tax. There are exceptions to this penalty, such as death or disability, or the need to pay for medical expenses or higher education.
- Having an income greater than $200,000. Okay, so this one really can’t be helped. Your income is your income, and as we’ve already stated, failing to report all of it is a huge red flag. Obviously, a higher income will likely generate a more complicated tax process and a larger refund. The IRS just wants to protect its own return on investment.
- Math errors, typos, and entry errors. Typos and errors in math will automatically be picked up by the IRS computer your forms are processed through. If you do your own forms, it’s always a good idea to consult a tax pro to check for any errors that might raise a red flag.
- How you earn your income. Businesses where unreported cash changes hands a lot—bars, taxis, restaurants, and salons, to name a few—are often more likely to be audited. Again, it’s important to report all income and prove legitimate deductions in these cases.
- Unusually high charitable donations. The IRS has statistical data that shows typical amounts for charitable donations based on income levels. Be careful to determine the value of charitable donations accurately and report them properly.
- Owning a business. Becoming a business owner is part of the American Dream, but it’s also apt to get you audited. Be sure to report every little bit of income you earn and account for all expenditures. Small businesses, especially sole proprietorships and cash industries, are especially subject to scrutiny. Businesses that sound more like hobbies are also more likely to be questioned.
- Claiming business use of personal property. Taking deductions for home offices and vehicles are definite warning signs for the IRS. It’s fine to claim them, but you have to make sure it’s done correctly. It’s rare for anyone to have a legitimate 100% claim on either. Make sure to only deduct the proper amount for business usage.
- Deducting business meals, travel, and entertainment. We cannot say this enough: please keep detailed records documenting business expenses. You must account for the amount, place, people attending, business purpose, and the nature of the meeting. Keep receipts for expenditures and for any lodging during your travels.
These are only a handful of the red flags the IRS typically looks for. Tax law can be fairly complicated. If you find yourself presenting more than one of these warning signs, give us a call. We’d be happy to help you with any of your tax prep, planning, and consulting needs.