We are often asked what types of things cause IRS audits. Although this list is not all-inclusive, it does point out some key areas that the IRS has targeted for examination. They see many of these items as "low hanging fruit" so the chances of audit may increase with each of these items on your return. Therefore, we recommend that taxpayers keep very organized and accurate records so that in case of an audit we can assist you in defending your legitimate expenses.
1. RED FLAG #1: Claiming 100% business use on a vehicle. The IRS knows it is extremely rare for an individual to use a vehicle 100% of the time for business use, especially when there are no other vehicles available for personal use.
2. RED FLAG #2: Deducting Meals and Entertainment on Schedule C: Taxpayers that claim large deductions for meals and entertainment are likely to set off alarms for the IRS. They are looking for unsubstantiated meals and entertainment as well as personal meals and entertainment that are claimed as business expenses.
3. RED FLAG #3: Hobby Losses: The IRS is looking for taxpayers with W-2 income and large Schedule C losses. The idea is that people claim business losses for "hobbies" when a significant amount of their income is from wages/salary on Form W-2. Activities that raise the flag even higher are activities that have a "personal enjoyment" factor associated with them such as dog breeding, horse breeding, car racing, etc.
4. RED FLAG #4: Deducting Rental Losses: The IRS is looking at taxpayers that claim to be real estate professionals to deduct large losses related to rental properties. If you have a W-2 and you deduct large rental losses, you may be under more IRS scrutiny.
5. RED FLAG #5: Running a small business: Owners of cash-intensive small firms such as taxis, hair salons, car washes, or other similar businesses are a tempting IRS audit target. The IRS knows that businesses that receive mainly cash are less likely to report all their income.
6: RED FLAG #6: Reporting higher than average deductions. The IRS may review your return if you report deductions that are disproportionately large compared to your reported income. However, if you have the proper documentation, you should not be afraid to claim the write-offs.
Please contact our office to set up your tax appointment soon!
Happy Tax Season!
Radke & Mohrhauser, LLC