The word “audit” is sure to strike fear in most individual taxpayers and business owners. After all, nobody wants to receive a letter from the Internal Revenue Service (IRS) stating their tax returns and financial matters are being investigated. While you can’t predict exactly when the IRS will decide it wants to audit you, there are definitely triggers that you should avoid. Here are five red flags that could trigger an IRS audit.
1. You did not report all your income
Not reporting all your income is a big red flag to the IRS. This is not just income you received and paid taxes on, which would likely have been sent to you as a W-2. This also includes 1099 income earned as an independent contractor. And remember, an organization does not need to issue you a 1099 if they paid you less than $600. But the IRS still expects you to report that income on your tax return. You also need to report income received from brokerage accounts, rental property and distributions from a college savings account to pay tuition.
2. You made large charitable donations
Donating to charity is a worthy expense and are a great way to decrease your tax liability. But too much of it can also raise a flag to the IRS. The IRS will look to see if your donations are disproportionately large compared with your income. You also need to make sure you file the IRS Form 8283 if you’ve made a non-cash donation of more than $500. This is common with vehicle donations or art.
3. Not being quite honest about your business expenses
If you own your own business or are a sole proprietor, you likely itemize and write off all your business expenses to decrease your tax liability. This is expected. However, the IRS look for expenses that are a bit out of the ordinary, such as excessive meals that are deemed an expense, or travel that may include more than business. Additionally, the IRS is strict about how much a vehicle can be written off as a business expense, or the exact square footage of a home office.
4. Earning more than $200,000
The IRS generally likes to audit those that make a substantial amount of income. If you’re an individual that makes more than $200,000, that can set off a red flag and your chance of being audited increases. Similarly, if you own a business with more than $10 million in assets, your chance of being audited are increased compared to that report less.
5. Reported losses from your hobby
It may be frustrating to start a new hobby and invest money into the endeavor, only to lose that money. But the IRS isn’t so sympathetic. The agency has specific rules and guidelines for what qualifies as business and what is a hobby. And if you claim losses for a hobby, that can often be a red flag to the IRS to start the audit process.
If you do receive a notice of audit from the IRS, it’s not the end of the world. Don’t try to work with the agency yourself. Consult an experienced San Francisco tax attorney or professional to help you navigate the IRS and your red flag risks.
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing tax problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving the IRS and state tax problems.
