Your risk of being audited in any given tax year is only about 2 percent, according to Forbes Magazine. But your chances of being audited by the IRS increase when you take certain deductions. These deductions raise red flags that could trigger a closer examination of your return. Some legitimate deductions raise red flags simply because they are in areas where the IRS has determined people are most likely to misreport their deduction. If you claim one of these deductions, keep receipts and other documentation to prove you were entitled to them.
The more you make, the more likely you’ll be audited. According to Kiplinger Personal Finance, if you earn $200,000 or more a year, your chances of being audited are about 3.93 percent. If you earn more than $1 million, your chances rise to about 12.5 percent.
The first red flag for an audit is a return with inconsistencies, such as an unusually large deduction that doesn’t fit with what other people in your income bracket usually deduct. For example, if you only make a few thousand dollars a year in income, but you deduct tens of thousands in mortgage interest, this might trigger the IRS to pull your return for a closer look. If you claim a large portion of your income for charity, you could be audited. Some tax preparation software will tell you what people in your income bracket usually deduct if you want to compare your deduction amounts to others.
Home Based Businesses
If you file a Schedule C, the IRS might pay closer attention to your tax return. Many people with home-based or small businesses file Schedule C. For example, the deduction for an office in your home is often subject to misuse. You can only deduct a room if it is used exclusively for work. If you use a room as a spare bedroom as well as a work space, it doesn’t qualify as a home office.
If your business brought in very little income, yet you deducted large expenses that resulted in a loss, the IRS is going to look more closely to see if the business is legitimate or if it should be classified as a hobby. The IRS normally expects you to realize a profit in three out of five years to avoid being classified as a hobby. However, if you can prove you’re legitimately pursuing your business despite a string of losses, you might be allowed to keep your deductions. Other kinds of losses might also trigger extra audit attention, such as a large casualty loss.
Large Expense Deductions
Any outsized expense used as a deduction can raise a red flag with the IRS. These include larger-than-normal moving expenses, very large medical expenses or excess business expenses. Be sure to keep receipts and other documentation to prove these were legitimate expenses.
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