Few things strike fear in the hearts of taxpayers like the risk of an audit. The threat of the IRS combing through assets and expenses to verify correctness can be anxiety-inducing, especially for those who aren’t fully confident in the accuracy of their tax prep skills.
While some audits are random, most come from very specific errors or red flags that arise in the course of an IRS review. When preparing your return this year or in the future, be sure to keep the following potential audit triggers in mind.
When you get a 1099 or W2 in the mail around tax time, the IRS receives a copy, too. This information is then cross-checked with your return to ensure everything is reported correctly. If you mistype a number or, worse, attempt to intentionally misstate income, the IRS will know – and respond – immediately.
High or Unusual Gross Income
Higher income is generally a good thing, but it also means extra scrutiny at tax time. If you earn more than $200,000, your chances of an audit quadruple. The higher your earnings, the bigger your chances. Big changes year over year can also pique the interest of the IRS.
Earn too little? You may also be at risk for a more intensive review. If your wages are significantly under minimum wage, the IRS may suspect you are hiding or underreporting cash payments.
High Charitable Deductions
Charitable donations are a great move morally, but could potentially put you into hot water if you give away too much. As taxpayers are generally not obligated to provide proof of donations on their tax returns, less than ethical filers use falsely-inflated charitable giving to increase the size of itemized deductions. If you do give large amounts to charity each year, be sure to keep thorough records in case the IRS comes to call.
It’s common for new businesses to struggle in the beginning, and the IRS knows this. However, if you’re operating your company as a pass-through entity that takes a few years of losses with no sign of profit on the horizon, you risk being classified as a hobby, thus rendering countless deductions null and void. This is very common for those operating in multi-level marketing spaces, for example, as an overwhelming majority of people in these ventures lose money. Some specific industries, like horse racing, are also likely to increase IRS attention.
Home Office Deductions
Working from home is becoming increasingly common, especially for freelancers and others participating in the gig economy. However, working from home doesn’t automatically qualify you for a home office deduction – a fact many taxpayers don’t know. In order to take a home office deduction, your workspace must meet the tax code’s strict wording; deducting space in your living room because you sometimes answer emails on the couch, for example, isn’t permitted.
If you’re living in fear of audit season, a little professional assistance can go a long way. With a team of CPAs by your side, you can rest easy knowing that your return is prepared properly and you’re ready to face any IRS inquiry, no matter the size or scale.
Want to learn more? Get in touch with Klein Hall CPAs today to see what our pros can do for you.