Although universally dreaded, IRS audits are actually quite infrequent. In 2014 less than 1% of all individual tax returns were audited, and that trend doesn’t look to change in 2015.
To minimize the risk of being subjected to this stressful process, this blog entry presents and explains five “red flags” that could cause the IRS to take an uncomfortably close look at your return.
Failure to report all of your taxable income
The IRS receives copies of your W-2s and 1099s, and their computers are efficient at matching the numbers on these forms with the income reported on your return. Any discrepancies will send up a red flag, so if you receive a 1099 with incorrect details, have the issuer adjust accordingly and file an updated version with the IRS.
Making a lot of high deductions
If you make deductions that are unusually large for your income level, your return may be reviewed more closely. That’s not to say that you shouldn’t claim legitimate deductions – just make sure that any deductions you claim have supporting documentation.
Claiming a lot of charitable donations
If your charitable donations are disproportionately large compared to your income level, alarm bells go off. Failure to obtain an appraisal for property donations or to file Form 8283 for non-cash donations over $500 causes more red flags to fly up. Keep all supporting documents for your donations, such as receipts.
Using a hobby activity to write off losses
Although you are required to report any hobby-related income, and expenses up to the level of that income may be deducted, it is improper to write off losses from a hobby. You can only claim a loss when you enter into an activity with the reasonable expectation of making a profit. If the activity produces a profit for three out of every five years, the law presumes that you’re in business and not a hobbyist.
Claiming total business use of a vehicle
When depreciating a vehicle, you are required to indicate on Form 4562 what percentage of its use was for business during the tax year. Claiming 100% business use of a car is one of the biggest red flags, especially if no other vehicle appears to be available for personal use.
Be careful when claiming business use for large trucks and heavy SUVs, because these vehicles are eligible for favorable depreciation rates and expense claims. To prevent the IRS from disallowing a legitimate deduction, ensure that your mileage logs and calendar entries are precise and detailed.
Finally, if you use the standard mileage rate allowed by the IRS, you aren’t able to also claim expenses for maintenance, insurance, and related costs.
These are some of the most common red flags that can lead to an IRS audit – but the truth is that nothing can completely eliminate the possibility of an audit. The IRS selects a small number of tax returns to audit completely at random each year. Should you face an audit, don’t panic! Speak to a professional tax attorney who can guide you through the process. Please contact us today to learn more!
Weisberg Kainen Mark, PL
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