I know that some may feel anxiety, discomfort and maybe even fear at the thought of being audited by the Internal Revenue Service (IRS).
The IRS, taxpayers and tax professionals have competing interests when it comes to taxes.
The IRS wants to impose the maximum tax liability or minimize tax refunds due to taxpayers.
Taxpayers want to receive a maximum tax refund or pay the minimum tax liability possible.
Then there's me, your tax professional.
Taxpayers want tax professionals to be aggressive in minimizing their tax liabilities or maximizing their tax refunds, but our goal is to (1) be an advocate for taxpayers, (2) educate taxpayers on the tax laws, and (3) file tax returns that are in compliance with the IRS codes, state and local tax laws to avoid penalties and possible audits for taxpayers.
Below are a few RED FLAGS to be aware of that can trigger an IRS audit:
Income that is reported on your tax return does not match what has already been reported by your employer to the IRS (failing to report ALL taxable income)
Tax Tip: Understating income will result in a penalty of more than 10% of the correct tax or $5,000
High charitable contribution in relation to your income.
Tax Tip: Failing to file IRS form 8283 for non cash donations over $500
Claiming your vehicle as 100% business use
Tax Tip: If you only have one vehicle, there's no way that you're using it 100% for business
Deductions for business use of vehicle.
Tax Tip: You can either claim (not both):
actual mileage (use app like Mile IQ or mileage log) or
actual expenses (i.e.fuel, oil changes, tires, repairs) must have receipts.
Rounded numbers on tax return (i.e. $2,000 or $800). No proper bookkeeping.
Income over $1 million
Engaging in virtual currency transactions
Tax Tip: The IRS is on the hunt for taxpayers who sell, receive, trade or otherwise deal in bitcoin or other virtual currency and is using pretty much everything in its arsenal. As part of the IRS's efforts to clamp down on unreported income from these transactions, revenue agents are mailing letters to people they believe have virtual currency accounts. The agency went to federal court to get names of customers of Coinbase, a virtual currency exchange. And the IRS has set up teams of agents to work on cryptocurrency-related audits.
Home office use deductions
Tax Tip: The space the you are claiming has to be exclusively and regularly used as an office.
Failing to report gambling winnings or overstating gambling losses
Running a business (understating income and/or overstating expenses on Schedule C)
IRS agents know from experience that self-employed people sometimes claim excessive deductions and don't report all their income. The IRS looks at both higher-grossing sole proprietorships and smaller ones. Sole proprietors reporting at least $100,000 of gross receipts on Schedule C and cash-intensive businesses (taxis, car washes, bars, hair salons, restaurants and the like) have a higher audit risk.
IRS agents also target business owners who report substantial losses on Schedule C, especially if those losses can offset in whole or in part other income reported on the return, such as wages.