Everyone dreads an audit by the IRS. Whether you’re intentionally cheating on your taxes or not, these seven things can cause the IRS to send you a special letter. Make sure you know how to avoid these IRS red flags.
- Under-reporting Your Income
Lying about how much taxable income you earned can prompt an audit. How does the IRS catch you? You’re not the only one who receives a copy of your W-2s and 1099 forms. Your tax return is matched with their records, which will report any discrepancies. Good luck getting away with this one. - Incorrectly Reporting Home Office Expenses
Running a business out of your home can be convenient and cheaper than renting a commercial space. However, home office business expenses are typically under higher scrutiny. Hold onto every piece of paperwork, receipt, and fill out all the necessary forms and you should have nothing to fear. - Treating Your Hobby as a Business
Well, you won’t have anything to hide if you’re actually running a business. If you’re trying to write off hobby-related expenses, then expect some trouble. Your home office needs to be a place of work, not a place to play. Are you running a small business that hasn’t been making money? Legally, if your business isn’t generating profit for three out of five years, it’s considered a hobby. - Being in the 1%
People with an annual income over $200,000 are more likely to be audited by the IRS; no more than 1% of people who make less than $200,000 were audited in 2014. Comparatively, 4% of people making $200,000 or more were audited, and 12.5% of millionaires were audited. In this case, there’s one way to avoid an audit: make less money.
On a serious note, the reason why the wealthy are more likely to be audited is due to their complicated tax returns. It doesn’t always pay off to be rich. - Taking a Gamble with your Winnings
Surely the IRS has better things to do than keep up with your casino winnings? Wrong. Unless you’re a professional gambler, you have to report your winnings on the 1040 form; pros use the Schedule C. - Generously Reporting your Donations
The IRS rewards you for your charity in the form of a donation deduction. Overestimating your donations in hopes of a better benefit can lead to an audit; the IRS expects the amount to reflect 1% to 30% of the donation’s original value. They also know what a monetary donation looks like for your income. If you made unusually large donations, keep any relevant documents and receipts and consider having your property donation appraised. - Careless mistakes
Many of us use an online tax preparation service that takes the pain out of filing your taxes. Programs like Turbotax make tax time a lot less stressful by taking care of math and even importing last year’s information for you. However, there is still some room for mistakes. Whether you do your taxes on the computer or fill out forms by hand, double-check your forms before submitting them.
