Each year, the IRS audits about one percent of all tax returns submitted by taxpayers. While this is a small number, an audit can be a real headache. Luckily, there are some ways of lowering the risk of an audit. What are some risks that can be avoided so a return will not get audited?
While it is perfectly acceptable for a business to lose money in a given year, it will send up a red flag for the IRS. If it can be helped, taking even a small profit for a tax year can significantly lower the risk of a return being audited. Taking a business loss is the easiest way to receive an audit since most of the deductions cannot always be verified.
Another common audit risk is claiming the home office deduction. Individuals who are either self-employed, or who are employed, but work at home, can deduct a portion of expenses that are related to business.
However, in order to get the deduction, the space has to be used exclusively for business, and cannot be used for anything even remotely personal. Even using the computer to watch a single YouTube video would disqualify an individual claiming the deduction. Since it is so hard to prove that a home office is exclusively a home office, the IRS may challenge that deduction more than others.
Taking deductions for items that don’t seem in line with income can be a red flag. For example, an individual who deducts mortgage interest on a 250,000 dollar home who then only claims 20,000 dollars in income might look suspicious. It could be that mom and dad paid for the home, but it will be another red flag for the IRS.
An individual who itemizes a return may face more scrutiny from the IRS than someone who takes the standard deduction. While there are many benefits to itemizing a deduction, be careful what is deducted. If a deduction is deemed as frivolous, it will be challenged by the IRS. For example, don’t claim that a dog is a mobile defense unit. It gets a good laugh, but the IRS will still deny the deduction.
While the overall risk for an audit is low, it is still a good idea to make sure to consult a professional if anything on a return seems unclear. Disputing a tax return with the IRS can be time consuming and unpleasant, so making sure a return is done properly can go a long way.