How to avoid getting audited - Avoid the "Red Flags"

07 February 2013 / Uncategorized / Comments Off on How to avoid getting audited - Avoid the "Red Flags"

Be aware of audit flags when filing!

Increasingly, the Internal Revenue Service has been chasing the big tax cheats and top earners to uncover missing tax revenue. But don’t think you’re immune to an IRS audit just because you’re a middle-class working stiff. Often, a simple mistake or an honest deduction in an area rife with abuse means that you could wind up getting audited anyway.

Most average Americans think their chance of an audit is slim, and that’s not altogether untrue. Millionaires and big corporations have a higher chance to be audited because they have a bigger tax obligation. Beyond these big guys, only about 1 percent of individuals taking home less than $200,000 annually are audited each year.

But while the IRS is understaffed, it isn’t foolish; systems are in place to identify those most likely to be tax cheats, and separate them from run-of-the-mill filers, regardless of income levels.  If your return boasts something the IRS sees as a red flag, it can dramatically increase the likelihood of an audit to your 2012 filing.  Here are five important items on your tax return that could grab unwanted attention from the tax man:

Not reporting all your income. This may seem obvious, but you must declare every penny you earned. Even the slightest variation from your filing and official IRS income records will raise red flags.  If you briefly held a temp job or did one or two freelance projects, you better track down the extra 1099s and W-2s no matter how small the income. If you miss them, there’s a chance the IRS will flag your return simply because the numbers don’t add up.

Minor mistakes on major information. A common audit prompt is a simple mistake regarding crucial information. Maybe you mixed up some numbers in your spouse’s Social Security number or forgot to carry the 2 when adding up your adjusted gross income (please...if you don't hire a CPA, at least use software!). The mistake may be honest, but unfortunately, IRS auditors don’t like mistakes.  If you’re a do-it-yourself filer, you should double-check every single line before submitting your form.

Home office deductions.
These deductions were abused for years by people who did a little work in the den in exchange for a lot of tax benefits they might not have deserved. The IRS frequently audits those claiming home office deductions, making them prove “exclusive use” for business purposes (if you have a daybed in the's NOT exclusive!!).  This is not to say you can’t claim a home office, of course, and those who are eligible can win big deductions for property taxes, utilities and insurance, among other items.  However, complying with IRS guidelines is key, or your deductions won’t survive the audit. That means no double-duty with the office functioning as a guest bedroom or a playroom for the kids, and avoiding seemingly benign dual uses, including stowing skis or Christmas ornaments in the closet!

Frequent business vehicle use.
Just as it’s easy to mix personal with business use in a home office, business vehicles are ripe for unqualified deductions and a red flag for auditors. Listing a business vehicle use on your tax form can warrant IRS attention whether you deserve it or not. This doesn’t mean you can’t claim a business vehicle, but make sure you have a detailed log with the date, destination and mileage for each trip – and that you don’t include stop-offs for coffee or dry cleaning.  It’s very rare for a vehicle to be solely for work (100% business use) without a single personal trip all year, so be honest when you file, and be aware that heavy business vehicle use means the tax man could likely come looking for your mileage log down the road.

Business “entertainment.”
If you’re self-employed, it’s tempting to claim lots of meals and travel on your tax return. However, while Schedule C allows for big-time deductions, it also historically has been a source of big-time overstatement. That means the IRS watches these kinds of items like a hawk.  If you’re claiming business-related trips and entertainment, it’s crucial to keep detailed records and receipts of who was there and what business was discussed at the meeting. Many Americans try to sneak in personal expenses, and that means even honest filers risk a red flag by claiming these kinds of deductions.

We here at Widget do NOT want you to be audited.  We preach good accounting and documentation to our clients so that the audit flags are minimized and that if they ARE audited, they will survive with their deductions intact.  If we can help you, please give us a call!

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