A taxpayer usually would invite an IRS audit with any one of the ten items below or with a combination of two or more depending on the severity of the condition. Here are some of the most common items that I have experienced in my 18 years of practicing accounting.
1. Most common of course is failure to report income reported on 1099-Misc or W-2: By law each employer will provide you with either W-2 or a 1099-Misc on or around January 31st. Thus, if you file a return but fail to report this income, remember the W-2 and 1099-Misc is also being simultaneously reported to IRS. Failure to include this income is tentamount to inviting IRS for an audit.
Also, omitting substantial 1099-Int and 1099-Div and Capital Gain transactions from stock trading activities, will invite scruntiny in the form of an audit.
2. Using estimates or round numbers on your deductions:
If a taxpayer is consistently using round numbers or estimates, it really implies that the taxpayer has been either exaggerating or has poor records to substantiate the deductions. Most CPA’s and tax professionals recommend the use of exact numbers
3. Reporting income that appears too low to support taxpayer lifestyle:
A taxpayer who reports mortgage and property tax expenses on his schedule A but showing income from employment not able to support these deductions will be inviting an IRS audit.
A taxpayer who consistently shows very little taxable income, and hence a small tax liability due but has substantial interest income and investment income could also trigger an audit.
4. Drastic changes in income:
Taxpayers whose taxable income undergoes substantial fluctuations can sometimes indicate that income was underreported somewhere. The IRS will be interested in these unusual income fluctuations.
5. Employee Business Expenses:
Employees that claim high amounts of employee business expenses, especially if these expenses appear to be mostly commuter expenses are most susceptible for audits. For example, claiming travel expenses for daily commuting, parking or train tickets to travel to work in metro cities. As such, these are generally personal expenses if the taxpayer is a W-2 employee.
6. Claiming subtantial Charitable Contribution:
The IRS has a strict rule of allowing taxpayers to claim charitable deductions, the existence of which is a cancelled check. Usually, the taxpayers have in the past claimed substantial charity deductions without any receipts from the charitable institution. Now, the other issue is could the taxpayer who has shown very little taxable income and with no interest income have any cash or excess funds to make those donations? IRS thinks this deduction could be doubtful particularly in case where taxpayer is showing very little taxable income.
7. Claiming office at home expense:
The most common area of deduction that generally triggers an IRS audit. The reason is that the office at home expenses are allowable under some very strict rules. “The office must be used exclusively and regularly for business purposes.” The so called designated area in the house must be generally a room where the family does not entertain, does not use as a play room for the kids and definitely not be used as a bedroom. The IRS loves to check this to determine if the taxpayer is correctly interpreting the tax law and that the taxpayer is complying accordingly.