1. Failing to report some income
Failing to report subcontract, interest, or dividend income are easy ways to attract an audit. I know that it’s tempting not to report income without W2s or 1099s but it’s not worth it. Many audits that I’ve handles even have 1099s but are lost or misfiled. IRS received copies of these documents so failure to report creates a mismatch with IRS computers leading to notice of unreported income. It could also lead to an audit if your tax returns. It’s not fun to be grilled in an audit for a small amount of 1099 that you missed. Ouch.
2. Using nice, neat, round numbers
Guesstimating with round numbers gives you away as a taxpayer who may not have taken numbers from actual disbursements and receipts but from wishful thinking. In my hundreds of cases defending taxpayers who get audited, just looking at a return with $1,000 telephone, $1,500 meals, $2000 auto expenses really speaks volume about how you arrives at those numbers. Using actual amouints of $970, $1462, or $1865 is probably more credible than rounded solid numbers.
3. Claiming too much charitable donations
IRS uses average donations for the entire country as a reference. For example, a taxpayer with adjusted gross income of $50,000 to $100,000 claimed $3,296 of charitable contributions. If you claim $10,000 of donations, you raise red flag so be sure to be able to produce checks, credit card receipts and thank you letter from non-profit organizations.
4. Reporting too many losses on a Schedule C
Filing Schedule C for sole proprietors is a red flag. Claim a loss and you’re waving a bigger red flag. Keep claiming losses year after year and IRS wonders how you stay afloat. Perhaps a hobby? Perhaps fudged numbers to reduce taxes or increase refunds? This is how IRS would look at it.
5. Deducting too many business expenses
Expenses must be ordinary and necessary to be deducted. Claiming excessive expenses that would even lead to operating losses waves a red flag that invites an examination by the IRS.
6. Claiming a home office deduction
Claiming office at home deduction. This was one of the hot spots of audits but has died down since the IRS instituted specific rules that narrow the gap between what you want to deduct and what IRS allows. Follow new the rules and you’ll be fine; claim 100% of office expenses and you attract scrutiny. Remember that home office refers to part of your home that’s “exclusively and regularly used for your trade or business.”.
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Victor Santos Sy, MBA. CPA (Retired)
Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to [email protected].