While there's no way to truly avoid being audited, these 10 red flags will increase your chances. However, good housekeeping and honest reporting will make the process fairly painless.
Although just over 1% of filed tax returns are audited by the IRS, even the possibility that it can happen makes some people nervous. Just because the IRS sends a letter that you’re being audited doesn’t mean that you necessarily did anything wrong—there are just certain things that attract the attention of the IRS.
Audits don’t even need to be scary since the vast majority of Americans don’t believe in cheating on their taxes, anyway. The auditor simply assesses the tax return in question line by line, pointing out any mistakes or asking for a justification of an unusual item.
The taxpayer being audited might owe more money at the end of the process or may be in the clear after all.
So what red flags catch the attention of the IRS? There are 10 big ones, according to H&R Block’s blog. Unfortunately, one of them is working in a career with high-income potential — aka being a doctor.
10. Missing or frivolous information
Even if taxpayers who have paid their taxes in full can be audited if the return is missing one of the following essential pieces of information:
• Social Security number(s)
• Filing status
The IRS doesn’t have time for jokes either: additional writing deemed “frivolous” can result in an audit and a $5,000 penalty.
9. Adoption tax credit
Although there is no deduction for adopting a child, the credit is fairly substantial and can be up to $12,650 for qualified taxpayers. According to a report to Congress, 69% of returns claiming the adoption tax credit are audited. So don’t fret, the IRS is just double checking.
8. Gambling losses
Just like with investing in the stock market, losses can be used to offset the money taxpayers win. A net gambling loss for the year will likely result in an audit.
7. Schedule C losses
The IRS expects a new, small business to be reporting a profit in three to five years, otherwise the government might think that you’re just trying to write off a hobby as a business.
6. Real estate rental losses
Real estate professionals can use losses from real estate to offset other income. However, the IRS’ definition of a real estate professional is fairly narrow, so claiming a loss when you are not a professional is a red flag.
5. Home office deduction
Taxpayers may deducted certain expenses — such as mortgage interest, insurance, utilities, repairs and depreciation — for the business use of their homes. However, the home office has to be used regularly and exclusively for business, otherwise the deduction does not apply. Plus, that home office space must be the principal place of business.
4. Failing to report income
The IRS receives notification of income on 1099s and W2s. If reported income is less than what the IRS already knows you’ve earned then an audit may follow. Since 1099s are not necessary for amounts under $600, you may have earned more than the IRS knows, but you still have to report it — sorry!
3. Certain activities
Professions with high-income potential are looked at closely. These include doctors, as well as attorneys and gas retail store owners. Keep good records to show you’re not hiding any income from the IRS.
2. High charitable donations
For donations over $250, taxpayers must have documentation from the charity in hand before they file. The documentation should show the date of donation, the name of the organization and the amount or value of any goods or services.
1. High income
The IRS has a higher pay off when it audits taxpayers with higher income. So although just over 1% of returns are audited, if you’re income is more than $200,000, then the chance of being audited jumps to nearly 4%. And those chances only increase along with your recorded income.
The Top 10 Tax Audit Triggers — H&R Block