Let’s talk about audit red flags. Nobody wants to be audited by the IRS. Even if your tax return is perfect and you have all of the documentation required to prove your deductions, it’s still a time consuming and a stressful process. So what can trigger an audit? Well, the good news is that in 2019, only about one in 220 tax returns were chosen for audit.
So statistically, most returns are not audited. Most of those were correspondence audits, meaning the IRS just sent a letter asking for additional documentation for one or more items on the return. Now, some returns might be chosen randomly, but there are things that are red flags that may make your chance of being audited more likely.
The IRS computers match all of the 1099s, W-2s, and other things that are reported under your Social Security number and they match it to the income that is reported on your return. So you want to make sure that you pick up all your income. This is especially true if you do things like walk dogs, clean houses, teach piano lessons, or do tutoring. These sort of things the IRS knows are prone to be paid in cash and so they really are looking for people to report all of their income.
The overall audit rate is less than one half of 1%. But, if you make more than $1,000,000, then your chance of being audited is about 2.4%.
Now, if your deductions are legitimate, by all means, take them. I’ll give you an example. I had a client who earned a very large bonus at the end of one year. In the following year, he gave a lot of money to charity and there was no bonus in that year. So when we filed his tax return, it appeared as though he had given almost half of his income away to charity. This is not a normal percentage so he received a letter from the IRS. All we had to do was submit proof of the charitable contributions, and that was the end of the story.
The IRS knows that people who file Schedule C have a lot of expenses and that these might not be legitimate business expenses. So they do like to put extra scrutiny on a schedule C, especially if you have a cash intensive business; like a bar or a hair salon.
If your business never turns a profit, the IRS is going to argue that you really have a hobby and you are not allowed to deduct hobby losses that exceed hobby income.
Who doesn’t run at least some personal errands or take the kids to school in the company car.
The IRS is using all sorts of methods to try to determine who is trading and transacting in virtual currencies. They have new teams of auditors who are specially trained for cryptocurrency audits. So if you are dealing with cryptocurrency, make sure that you report all the gains and losses on your tax return.
If you have any further questions about how to prevent being audited this tax season, reach out to an Alloy Silverstein advisor today!
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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