9 RED FLAGS THAT COULD TRIGGER A TAX AUDIT
The IRS is constantly on the lookout for people who might be fudging tax rules by under reporting their income, claiming deductions and credits that don’t apply to them or partaking in an array of other tax-dodging techniques. If the IRS does request more information from you, it will usually do so in the form of a letter, so don’t fall for scam emails sent by fraudsters impersonating the government agency. Here are 9 potential audit triggers:
- You made a lot less money last year.
The IRS often flags major changes in your income that a taxpayer is under reporting earnings. Since the IRS tracks historic data, people who suddenly start reporting much less income can be subjected to an audit for a closer look.
- You lose or forget to file a form.
Since employers send copies of all 1099 forms and W-2 forms to the IRS, as well as to you, if you lose your version or forget to file it with your taxes, the IRS might notice it’s missing and flag your return for review. If you receive a form that looks like it has an incorrect amount or inaccurate information on it, be sure to talk to your employer before filing your taxes so the correct information makes it to the IRS.
- You work for yourself
It might not seem fair, but being self-employed can raise red flags for the IRS, especially if you claim your home office and other costs as business expenses but don’t earn much income. As long as you keep careful track of all paperwork so you can defend any deductions and credits you take, then you shouldn’t have anything to worry about.
- You claim losses from a hobby
While writing off business expenses can be legitimate, it’s illegal to pretend a hobby is a business and then write off the related business expenses. For example, if you enjoy woodworking, you might practice the craft on the weekends for fun. Doing so does not enable you to write off the cost of wood and tools, which would only be allowed if you expect to make a profit from the work.
- Deducting home office or automobile expenses
While plenty of people can legitimately claim home office expenses on their taxes, some people do so incorrectly. Merely checking email from home after work, for example, does not justify a home office deduction. In order to qualify, the home office must be used for work only. Likewise, claiming a car as a business expense can also raise red flags. Again, maintain a pristine paper trail so you can easily explain yourself if asked.
- You deducted expensive meals and entertainment
The IRS often double-checks these types of claims to make sure they are legitimate business expenses. The agency wants to make sure people aren’t enjoying upscale meals at Uncle Sam’s expense.
- You were particularly generous this year
The IRS is always on the lookout for people who inflate their charitable donations. The answer, if you donate money, is to keep all your receipts and records of donations so you can explain any deductions that you claim.
- You maintain an overseas bank account
In recent years, the IRS has added more reporting requirements for people with money in foreign accounts. Failing to report one could trigger an audit, so you’ll want to review your records carefully.
- Your numbers don’t match
If numbers on various forms don’t match or add up correctly, the IRS is likely to notice and look into any disparities. Treat our taxes like a final exam in math class, and check over all the numbers before submitting. If you file using a software program, much of this math is done for you.