10 Reasons the IRS Might Audit Your Return

Gene Barrett –

What sets off alarms at the IRS? The IRS only audits about 1% of all federal individual tax returns, while the other 99% go through unexamined. Nevertheless, it pays to keep in mind these 10 “red flags” that could increase the chance you’ll be targeted for an audit.

1. High income. The audit rate for 2011 tax returns, which was about 1.11% overall, shot to 3.93% for taxpayers with income of $200,000 or more. That’s almost one out of every 25 returns. The IRS tends to chase the “big money,” and while that’s no reason to earn less, you should realize that higher income exposes you to a greater audit risk.

2. Unreported income. The IRS computers match up the income listed on W-2 and 1099 forms with the income reported on individual returns. You’re likely to draw IRS scrutiny if you don’t report all of your taxable income or if you underreport the total, even if an omission is inadvertent. Check your tax forms to ensure the information is correct.

3. Large charitable gifts. Besides providing personal satisfaction, deductions for charitable gifts can offset highly taxed income on your return. But the IRS may become suspicious if the amount you deduct is disproportionate to your income. In particular, make sure that deductions for gifts of property are legitimate and include an independent appraisal when required.

4. Home office deductions. If you qualify, you can write off your direct costs of using part of your home as an office, plus a percentage of everyday living expenses such as property taxes, mortgage interest, utilities, phone bills, insurance, etc. But the basic rule is that you must use the office “regularly and exclusively” as your principal place of business. Simply doing work at home when your main office is elsewhere won’t cut it.

5. Rental real estate losses. Generally, “passive activity” rules prevent investors from deducting losses on rental real estate. But a special exception allows a loss deduction of up to $25,000 for “active participants,” subject to a phase-out between $100,000 and $150,000 of adjusted gross income (AGI). Another exception applies to qualified real estate professionals. The IRS may zero in on taxpayers claiming losses under either exception.

6. Travel and entertainment expenses. This is often a key audit target. IRS agents particularly look for self-employed individuals and other business owners who claim unusually large write-offs for travel and entertainment expenses and meals. Note that the tax law includes strict substantiation rules that must be followed in order to deduct any of these expenses.

7. Business use of cars. Another area ripe for abuse by taxpayers is the use of a vehicle for business purposes. The annual amount you can claim via depreciation deductions for the vehicle, based on percentage of business use, is limited by so-called “luxury car” rules. IRS agents have been trained to ferret out taxpayer records that don’t measure up. Another red flag is a claim for 100% business use of a vehicle, especially if another vehicle isn’t available for personal use.

8. Hobby losses. As a general rule, you can deduct expenses for a hobby only up to the amount of the income it produces. You normally can’t claim a loss for the activity, unless your involvement rises to a level of a bona fide business. Usually, an activity is presumed not to be a hobby if you show a profit in any three out of the past five years, but the IRS can refute this presumption.

9. Foreign bank accounts. The IRS has started clamping down on taxpayers with offshore accounts in “tax havens” in which banks do not disclose account information. Failure to report foreign income can trigger steep penalties and interest. If you have foreign bank accounts, make sure you properly report the income when you file your return.

10. Cash businesses. If you operate a small business in which you’re largely paid in cash—for example, if you own a car wash, restaurant or bar, or a hair or nail salon—the IRS is more likely to examine your return. Past history indicates that cash-heavy taxpayers may underreport their income or, in some cases, not report any income at all. Accordingly, the IRS remains on high alert.

These red flags don’t mean you should shy away from claiming the tax breaks you rightly deserve. Just be prepared to defend your turf if the IRS knocks on your door.


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4 years ago

Irs needs to get theses people filing self employment i know a lot of people havent work a day in their life and getting 8 and 9 thousand dollars back thats fuck up please the irs needs help

7 years ago

Here’s Number 11, don’t write your Senator a letter of disapproval, Harry Reid in this case before his re-election, you will open the door for an audit and untold headaches — they went back 3 years.

Joyce D.
7 years ago

Put the Obamas and Bidens to the test. Betcha they’re getting away with murder re their taxes.

Gregg Hunt
7 years ago

Well i believe that one should take care of home 1st them his neighbor. So lets take care of America 1st then help the other countries as we can. We have homeless, jobless and no manufacturing to speak of. Either we give the jerks breaks to bring the decent jobs back to America or they stay. And don’t even get started of the medical side. i for one cant afford to retire so ill die working or retire in a 3rd would country.I refuse to run out of things with what savinsg and social security will pay. And unless your… Read more »

7 years ago

I would encourage the ‘public’ to read the fourth amendment. Since the bill-o-rights is primarily designed to protect us from the government, what other papers would you have a right to be secure in (privacy) if not your financials? I would suggest that if you get a notice of audit, that you politely but firmly insist the IRS get a warrant to see your most private stuff. If you volunteer to show it to them, they will not have violated your rights – you volunteered!. It is my understanding that if you politely insist on this, you probably won’t hear… Read more »

K. McCoy
7 years ago

Keep good records, keep every receipt that you get, and pay your taxes on time. Our government own us….we are no longer free. Expect more audits now that more IRS agents have been hired under this president.

Daphne Krueger
7 years ago

I joined AMAC and they pointed me to a dental insurance. Previously my insurance paid for only one check up a year, xrays every two years. AMAC found an insurance, at $2. less and it pays for two check ups a year and half price on other services. Thanks AMAC!

Pete from St Pete
7 years ago

As a 26 year professional income tax preparer I have found that the best defense against having to pay more taxes as a result of an audit is to keep accurate, timely records of your claimed deductions. Yes, it is onerous to sit down after a long hard day on the road or at work and to record the business mileage you drove that day or who you took to lunch and what business topic you discussed, but it can save you big money in the long run. Insist that any substantial gift to charity be acknowledged by the charity… Read more »

Paul Hecker
7 years ago

It is amazing that a top ten list has not been corrected to read #1 if you oppose Obama you will be audited .#2 If you are employed by the fedral Gov. you do not have to pay. The Democats belive all the money you have eaned is thiers to take and spend as they see fit.

7 years ago

Your article is right on.
I suspect the rate of taxpayer abuse, audit and collection will increase since Obama-care permits all Federal Agencys to cross-pollinate their databases.

Myra Dees
7 years ago

The IRS is nothing but collection thugs, based in Puerto Rico, bill collectors for the Treasury. the 16th Amendment was never radified. Of all the taxes that are paid, NOT ONE CENT goes to the government for any services. All money after the IRS gets their cut for collecting it, goes to the Banksters for the fake loans that were created. Not one cent goes to help our country. Why do you think the tax code has thousands and thousands of pages? TO CONFUSE PEOPLE. When the tax code was first created, it just had a few pages. People better… Read more »

7 years ago

Good info for the general public. This top 10 list has been floating around for years, but it’s amazing how few people actually know any of this.

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