16 top triggers for an IRS audit
Have you ever wondered what the top triggers for an IRS audit are? Well, now that the season for giving is nearly over, the new year will bring a different kind of season.
Tax season, to be exact.
I know, just the thought of it is enough to make you scowl like Ebenezer Scrooge on his worst day.
Before you begin brooding, there are a few important things you should know.
The good news is there are only a handful of reasons why people get audited in the first place.
Odds are, unless you're super wealthy or make an alarming error, you'll probably never face an audit.
Sometimes things do happen, however.
You can steer clear of the frustrations of an audit by keeping these 16 top triggers for an IRS audit in mind.
1. Too many schedule C losses
Sometimes, your business can have a bad year. It happens.
However, if your business reports signficant losses three or four years out of five, you might find an IRS agent at your doorstep giving you the funny look,
The reason for this is that claiming zero profits and considerable losses over a consistent period puts the legitimacy of your business at risk.
The IRS will require you to show evidence that you truly intend to make a profit.
If you're wondering factors could trigger and IRS audit you'll find that the main reason is usually attached to suspected fraud.
People have been trying to not pay taxes since taxes were invented. If it's been tried before, even if you aren't engaging in fraudulent behavior, the IRS will look into it.
2. Home office deductions
If you occasionally use your home office for work, it can be tempting to add a lot of deductions here.
However, this is an area that IRS carefully examines because it's teaming with fraud.
So unless you use your home office on a regular basis for business purposes avoid claiming deductions that don't actually represent your typical work week.
3. Failing to include a Form 1099
If you receive multiple 1099 or W-2s, it's really important you list that income on your tax return.
This is one of the most common answers when people wonder what the top triggers for an IRS audit are.
Failure to list all your income is a big deal. And that IRS knows if you're not being honest.
The IRS receives a copy of all these forms, which are stored in a database. Computers will then crunch the numbers analyzing and looking for any mismatch.
If the figure you list on your return doesn't match the figure in the database, you could find yourself faced with an unexpected bill in the mail.
4. Too many unreimbursed business expenses
When it comes to business, this is the biggest slip up of the top triggers for an IRS audit.
Large write-offs for business meals, travel, and entertainment send off alarm bells.
If you do spend a lot on meals, travel, or entertainment when it comes to your business, always make sure you keep all receipts, especially for accommodation that exceed $75.
5. Early IRA or 401 (k) payouts
Taking out an early payout, or loan, from your 401 (k), puts your tax return under some scrutiny.
Early payouts are subject to a 10% penalty, unless qualified for an exception. Nearly half of all the individuals given a second look by the IRS made errors on their returns in regards to their retirement payouts.
For this reason the IRS generally pays strict attention to anyone who receives a payout before age 59.
6. Too many, or too large, charitable deduction claims
If you claim charitable donations that don't match up with your income level, you can instantly become a target.
Additionally, failure to file Form 8283 for donations made that exceed $500 or failure to get an appraisal of donated property can also make you live bait for an audit.
7. Failure to report extra income
This is one of the most important top triggers for an IRS audit.
While you may not forget to report 1099 or W2s, it can be easy to overlook other forms of taxable income you make throughout the year.
These can include brokerage accounts, income from a rental property, and even using the funds from a college savings account.
Another form of "income" that is often overlooked during the filing process is big earnings from Gambling. Gambling earnings must also be reported to the IRS via form 1040.
8. Claiming too many small business deductions
Another area where you can end up in hot water with Uncle Sam is filing too many deductions for your small business.
Even if those deductions are completely creditable, they can still warrant an audit because so many small businesses try to squirm their way out of paying taxes by claiming large deductions, or not reporting all of their income.
Always make sure that the deductions you give yourself are completely warranted and can be backed up a paper trail.
9. Using a tax preparer with a bum rap (bad rap)
You know the saying, "if it looks like a duck..."?
Although you might have rolled your eyes at your parents when they gave you that lecture during your angsty teenage years, it still rings true with the IRS.
Using a tax preparer that is under scrutiny with the IRS will most likely get you put under the financial microscope.
Before selecting a tax preparer, do your research.
Should you discover that your tax man is not all he's cracked up to be too little, too late, having your financial records readily available can make your unwanted time in the limelight go by much smoother.
10. Small errors
Mistakes happen. But some times a teeny-weeny error can turn into a huge miscalculation.
Sometimes there's no help for it. You can carefully review your return and still wind up making a mistake.
Unfortunately, this is one of the top triggers for an IRS audit.
The most important thing to know is that getting audited over a small mistake is not the end of the world.
However, there are some clumsy errors you ought to do your best to avoid completely, like using round numbers, especially when it comes to deductions.
Other negligent mistakes include writing in the wrong social security number, typos, and failure to sign.
Always make sure you review your return carefully because these mistakes can be costly.
11. Not filing, or filing late
An even bigger blunder that can happen is forgetting to file your return.
Failure to file, or file on time, will cause the IRS to file a return on your behalf using the information in your W2s and 1099s.
However, what the system won't account for is your deductions, which can hurt--a lot.
12. Vague deductions
If you don't know what exactly it is you are claiming on your tax return, odds are an IRS agent also has no clue.
That's why it's really important to study up on what deductions you're eligible for given your income and personal circumstances.
If you're really at a loss, the best thing to do is to seek the help of a reputable tax professional.
13. Claiming earned income credit
Tax credits are another area where the IRS may just give you a second look.
For anyone who's curious to know what could cause you to get audited by the IRS, this is another big trigger.
Tax credits can be difficult to calculate and extremely attractive since they're refundable, which makes the IRS suspicious.
Claiming a large income tax credit despite having a big salary will most likely trigger an audit.
So always claim credits that are applicable to you.
14. Taking a huge pay cut
Significant drops in your income without much reason for it also raises some red flags for ole Uncle Sam.
Losing your job is one thing. Being steadily employed for years and earning significantly less will make the IRS suspect fraud.
The same goes for significant dips in profit that seem inexplicable.
If you suffer either of these you might just become the target of an audit.
15. 100% use of a business vehicle
This is a claim that can have an IRS agent all over you faster than a shark in bloody waters.
Odds are you probably don't use a depreciated vehicle solely for professional purposes, and IRS agents know this.
If you do in fact own a vehicle that you only use for work, it's really important that you keep your mileage and frequency of use records up to date.A great tool to keep mile log is MileIQ.
16. Making large bank transactions
The final point to note of the 16 top triggers for an IRS audit is questionable activity.
Though you may not be aware of it, your bank reports suspicious activity to the IRS.
While you may not be doing anything fraudulent, large wire transfers or deposits that exceed $10,000 or happen on frequent basis can raise some eyebrows.
If you really want to avoid an audit, don't give Uncle Sam a reason to come poking around in your finances.
Do these 16 top triggers for an IRS audit make sense?
When it comes to dealing with the IRS, detailed records are your best friend.
Keeping careful logs of expenses can be a life saver in the event of an audit.
Detailed records can also do wonders for tax deductions. That's why it's so important to keep track of your financial activities throughout the year.
If you have the evidence to back up the claims you made on your tax return, you'll always be in the clear.
However, simply keeping good records isn't enough.
You also need to have a firm grasp on how taxes work.
Should you struggle to understand the process, the safest bet is to seek out a tax professional or program that specializes in filing.