Although the IRS only audits 1% of all tax returns processed, being audited by the IRS is still a huge fear of both taxpayers and business owners. While there are many factors that can increase your chance of being audited, if legitimate, it’s important to make sure that everything is properly documented if the IRS comes knocking. Although there is no way to guarantee being able to avoid an audit or no way to predict being audited, it’s wise to familiarize yourself with some red flags that the IRS may be looking for.
Failing to Report ALL Taxable Income
Remember that the IRS receives copies of all 1099s and W-2s, so make sure to report all earned income on your return. IRS agents and their systems are very good at sniffing out discrepancies, which raises a red flag.
Engaging in Large Cash Transactions
The IRS receives many reports of cash transactions exceeding $10,000.00 from institutions like casinos, auto dealerships, banks, insurance companies. Making large cash purchases or deposits raises your chance of being audited, so make sure to keep proper details and documentation for any type large cash transaction.
Claiming a Home-Office Deduction
The IRS is attracted to tax returns that claim home-office deductions because historically it has found success in pursuing these cases. That said, there are great potential savings if you do qualify for this deduction. You can deduct a percentage of your real estate taxes, utilities, phone bills, insurance and other additional costs. Remember that the space must be used exclusively for work purposes.
Claiming Day-Trading Losses
The IRS is no stranger to filers that are investors who report trading expenses or losses due to the significant tax advantages and benefits granted to people that trade daily in securities. When these red flags are detected, the IRS will check to make sure that the taxpayer is indeed a legitimate trader.
Claiming 100% Business Use of Your Vehicle
Claiming 100% business use for your vehicle is another huge red flag for IRS agents. It’s not common for someone to use an automobile 100% of the time exclusively for business.
It’s important to keep detailed records of road trips and mileage logs to because bad or no record keeping could to the IRS disallowing your deduction.
Big Deductions for Food, Travel, and Entertainment
Big meal, travel and entertainment deductions are always susceptible to scrutiny by tax agents. It’s imperative to document each expense with details like amounts, attendees, place, business purpose and topic of meeting. Failing to keep detailed records could lead to you losing that deduction.
Claiming Large Charitable Deductions
Charitable contributions are a great tax write-off, besides the obvious emotional benefits of being charitable. However, if your contributions are much larger in comparison to your income, this could earn you a call from the IRS. Agents are well-aware of what the average donation is for people of similar income levels and will question it when disproportionate. Make sure to keep detailed records and supporting documentation to protect your deduction.
Are You Concerned About the Deductions You’re Claiming?
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