The information in your personal tax return is critical in determining whether the IRS may choose to audit your return. One of the ways your tax return can be selected for an audit is through computer screening. The IRS computers can pick up certain “red flags” on your return.
Here are some items that can be “red flags” for an audit
GENERAL RED FLAGS
- Filing your tax return really late
- Filing an amended return with some substantial changes to your original return
- Reporting over the top deductions for mortgage interest. For example, small income but a large mortgage interest, can be a red flag
- Using the wrong tax preparer. Someone who promises a large refund by increasing your expenses and other deductions beyond what you can actually prove
- Owning a business
- You’ve been audited before
- High income individuals
- Claiming the Earned Income Tax Credit
- Claiming the Adoption Credit
- Filing a handwritten, sloppy return
If you are self-employed or own your own business, certain items on your Schedule C can act as red flags.
RED FLAGS ON SCHEDULE C THAT CAN LEAD TO AN AUDIT
- Not reporting all income. You must account for all cash, Form 1099s and other sources of income from your business
- Reporting little income but much larger expenses
- Reporting a high volume of cash reporting without having Form 1099s to show
- Reporting business losses year after year. You must show a profit in 3 out of 5 years, including the current year.
- Reporting expenses for an activity which is really a hobby and not a bona fide business. For example, if you deduct expenses for dog shows, hair braiding, collecting books, stamp collecting, antique collecting, cycling, horse racing, car racing and other recreational or sports activities, these may lead to an audit.
- Reporting certain expenses that appear substantially larger than expected for similar businesses. For example, you are a hairdresser who works in a salon but you report large mileage expenses.
- Reporting large miscellaneous expenses
- Reporting large travel, meals and entertainment expenses
- Reporting large health care expenses
- Reporting large contractor expenses
- Using round numbers for all expenses. There is a good chance the numbers are made up or not accurate.
- Deducting home office expenses using a high percentage of the total square footage of your home.
THE MOST IMPORTANT PIECE OF ADVICE IS TO BE ACCURATE, HONEST AND REALISTIC IN REPORTING YOUR DEDUCTIONS. YOU MUST ALSO HAVE AND KEEP ALL SUPPORTING DOCUMENTS NEEDED TO PROVE THE EXPENSES YOU CLAIM.
