- Days left

Seven Common Audit Triggers and Ways to Avoid Them

Avoiding Audit triggersThe IRS has made no secret of the fact that it is ramping up audits in order to close the "tax gap." The "tax gap" is the difference between what the IRS expects to collect and what it actually does collect. In 2005, the IRS estimated this gross tax gap, before collections efforts, to be approximately $345 billion.

The good news is that the IRS doesn't expect to shrink the tax gap with random audits. While it's true that some returns are randomly selected for examination, most of the time the IRS has a reason for plucking a form 1040 out of the pile. In other words, audits are generally triggered by a specific item or pattern of behavior on your tax return (or tax returns). Following is a brief checklist of items or behaviors that might trigger an audit:1. Failing to Include a Form 1099 or Other Income

The IRS suggests that over 60% of underreported individual income tax is related to business and self-employment income, so ensuring compliance with those individuals is a priority. As part of their efforts, the IRS matches forms 1099 in their records to the amounts on your return, so make sure those are correct.

2. Inflating Home Office Deductions

If you use part of your home for business, you're entitled to deduct the related costs as a home office deduction. However, to qualify for the home office deduction, the IRS says you must use the part of your home attributable to business "exclusively and regularly for your trade or business." That means your home office must be your actual office, not just a spot in your home where you sometimes do work, and it must be exclusively workspace and not used for other purposes. In most cases, you'll calculate your deductions based on the size of your home office -- measure carefully and resist the temptation to overstate the size of your office.

3. Citing Too Many Losses on a Schedule C

Filing a Schedule C isn't generally enough to trigger an audit, but taxpayers who file a Schedule C may be statistically more likely to face an audit. One reason is that there is a temptation to overstate losses on your return. Keep in mind that the IRS assumes you're in business to make money. Filing a loss year after year might make the IRS question whether you're serious about your business -- and how you're getting by.

4. Claiming Disproportionately High Charitable Deductions

Charitable deductions are one of the most common deductions claimed on a personal income tax return. In fact, more than 90% of taxpayers who opt to itemize claim charitable deductions. Taxpayers who claim the charitable deduction donate, on average, about 3% of their income. Of course, many taxpayers routinely make large donations due to religious or other charitable reasons. If you're one of them, be sure and document your donations properly, especially cash donations, and make sure the values of non-cash donations make sense.

5. Using Too Many Round Numbers

You know how every now and again, your bill at a store will turn out to be $20 even, and you find that hard to believe? The IRS looks at tax returns that way, too. Your tax return isn't intended to be an estimate. You should report your actual items of income and losses, not approximations. If the IRS sees too many numbers that look like guesses, they may ask you for supporting documentation.

6. Reporting Rental Real Estate Losses When you Don't Materially Participate

As a rule, the IRS considers all rental real estate activities that aren't performed by real estate professionals to be passive activities. For tax purposes, that means expenses associated with rental real estate activities will be deductible only to the extent of rental income (some exceptions apply). However, if you're considered to be in the business of renting real property because of your active involvement, you may be entitled to deduct rental real estate losses in full.

7. Citing Too Many Business-Related Deductions

To be considered a bona fide business expense, an expense must be both "ordinary and necessary ... in carrying on any trade or business." If you have a lot of deductions that seem a bit out of the ordinary for your trade or business, you may call attention to your return. A good rule of thumb when determining whether to claim a business-related deduction is that there should be a clear connection between your expenses and your business in order to take the deduction. Don't try to make something fit that clearly doesn't qualify, and, of course, keep excellent records.

Remember that there's nothing in the tax law that says you should pay more in taxes than you have to ... so don't be afraid to take legitimate deductions on your return. Be careful, however, to report income and expenses properly and keep good records.


Increase your money and finance knowledge from home

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Goal Setting

Want to succeed? Then you need goals!

View Course »

TurboTax Articles

Ways To Increase Your Tax Refund You Never Thought About

Laying the groundwork for a tax refund requires some simple tax planning, a little research and some forethought. Reviewing your tax status, consulting your spouse when filling out your W-4s and taking advantage of several tax credits can help you increase your tax refund. TurboTax also can help decide which credits can get you the biggest refund.

What Extra Tax Deductions Should I Make Sure To Take?

The federal government offers tax deductions and credits to reduce taxable income under certain circumstances. There are several that are often overlooked, including deductions for job hunting, caregiver expenses for dependents and children while you work, a credit to reduce taxes for moderate- to low-income earners and the premium tax credit associated with the Affordable Care Act. TurboTax can help determine if you qualify for these credits and deductions.

8 Things You Think Are Tax Deductible That Aren't

There?s a fine line between looking to save money on your taxes and taking deductions that will raise eyebrows at the Internal Revenue Service. Some taxpayers are tripped up by expenses that they assume are tax deductions, but don?t qualify under IRS guidelines. Here are a dozen items that can lead to unpleasant surprises in case of an audit.

9 Things You Didn't Know Were Tax Deductions

Few realizations are more painful than realizing that you forgot to include a tax deduction that would have lowered your tax bill or increased your tax refund on your tax return. Here are some tax deductions that you shouldn't overlook.

Add a Comment

*0 / 3000 Character Maximum