You might have filled out your tax forms perfectly, but at least one red flag raises your chances of an IRS audit. Or perhaps you are not sure whether to record something in case it turns out to be a red flag and you have lost the documentation backing it up.
Here is an overview of a few things on your tax return that could prompt the IRS to take a closer look:
Deductions that do not match your income
If you make, say, $50,000 but claimed $10,000 in charitable deductions, that could give the IRS pause. In fact, even the average charitable deduction for those who make $100,000 to $200,000 is only $4,130, according to IRS figures from 2014. The bottom line: Document everything exhaustively to ensure your good deed goes unpunished.
Home office deductions
Many people take home office deductions and never get audited. However, these deductions are easy to misunderstand and easy to abuse. For instance, the IRS has an extremely restrictive definition of a home office and does not allow the space to be used for any personal purposes. If your home office seems too big or you have claimed that deduction along with a few others that raise eyebrows, you might be at a higher risk of audit.
Earning a lot of money
People who report less than $25,000 in income were audited at a rate of 0.8 percent in the fiscal year 2016. In comparison, those who earned at least $10,000,000 were audited at a rate of 18.79 percent. Simply put, the more money you make, the higher your chances of being audited are. There is really nothing you can do about this “red flag.” Just be sure your return is, as always, as accurate as possible.
Claiming a lot of business expenses
When you are self-employed, you can claim business expenses that are reasonable and required for your work. For example, it is normally appropriate to claim deductions for subscriptions for magazines you keep in your office waiting room. But what about claiming deductions for skis you use on vacation? It may be hard to justify such a purchase as a business expense.