Even if you dutifully pay 100% of your tax liability and all of your annual filings are complete, accurate and timely, the fact remains that the last thing you want to experience is an IRS audit. It’s a time-consuming, costly and stressful process. With this in mind, here are 5 ways that you could trigger an IRS audit:
1. Disproportionately Large Charitable Donations
There is certainly nothing wrong with opening your heart — and your wallet — to make a donation of any amount to a registered charity. However, if your charitable gift is significantly disproportionate to your income (e.g. you make $80,000 in a tax year and donate $25,000), the IRS may want to take a closer look. See the IRS’s website for more information on charitable donations.
2. Disproportionately Large Home Office Deductions
Simply having home office deductions is not going to put you on the audit radar screen. However, if your deductions are disproportionately large (compared to your other returns, and compared to other filers who fit your profile), then you should expect the IRS to grow suspicious. Remember: your home office must be your principal place of business in order to make any deductions — regardless of the amount. If your normal place of business is elsewhere, it doesn’t matter that you may do some work at home.
3. High Business Use of Vehicle Deductions
Just as there is nothing wrong with legitimately claiming business use of home deductions (which can include supplies, utilities, etc.), there is nothing wrong with claiming business use of vehicle deductions — which includes depreciation deductions, as well as fuel, maintenance, repairs, auto club membership, and so on. However, the IRS is wary of filers who claim that a vehicle is used primarily or exclusively for business purposes; especially when there’s no personal vehicle available.
4. High Travel and Entertainment Expenses
The IRS pays close attention to travel and entertainment expenses, because many self-employed filers and other business owners routinely fail to follow strict substantiation rules (often out of ignorance or carelessness, but sometimes there is a deliberate attempt to evade tax liability).
5. Deducting Hobby Losses
One of the biggest myths in the tax filing world that refuses to go away, is the mistaken belief that tax filers can deduct hobby losses. In fact, the term “hobby losses” is something of a misnomer, because as far as the IRS is concerned, a hobby is simply that: a hobby. The only way that a hobby-like activity can generate deduction claims, is if it rises to the level of a legitimate business. Generally, this is understood as an activity that has generated profit in three of the last five years. However, this is not a legislative standard, and the IRS at its discretion can refute this — which is why getting advice from a tax attorney before attempting to claim any such deductions is vital.
For more information on what can trigger an IRS audit, read this helpful article featuring board certified tax attorney Jeffrey B. Kahn, whose tax and financial advice Q&A radio show can be heard on ESPN radio each week.