Most taxpayers have little to worry about regarding an IRS audit, but that doesn’t mean you shouldn’t be careful about inadvertently sending out warning signs. Once the tax authorities become aware of a potential discrepancy, it is too late to make the problem simply go away. You can lessen your chances of getting audited by keeping an eye out for a few common red flags.
Claiming illegitimate business expenses
You may make many purchases that help you with your business, but that doesn’t necessarily mean the IRS will agree they are legitimate business expenses. Such items must be necessary to a given occupation and ordinary, which the IRS defines as “common and accepted.” For example, if you run a delivery business, fuel for making deliveries is both a necessary and ordinary expense and therefore likely deductible. Buying fuel simply to get to and from work, however, is generally not deductible.
What about the home office?
Home office deductions have become a common point of dispute ever since the global pandemic forced millions of workers out of conventional office settings. The IRS has made its policy clear on this issue, stating that, “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.” If you are self-employed, a gig worker or a contractor, you may be more likely to qualify for such a deduction.
Another red flag appears when a taxpayer claims an inordinate amount of charitable deductions. These expenditures are a good way to save on taxes while supporting a good cause, but make sure you have the receipts to back them up if you plan on reporting them as deductions.
Nice, round numbers
Too many zeroes in your reported income or expenses may draw unwanted attention from the tax collectors. You can round to the nearest dollar, but rounding to the nearest ten or hundred dollar amount could land you in trouble.
Eliminating red flags can spare you from the time, expense and worry of a tax audit. When a problem does arise, make sure to take action as soon as possible so you can mitigate trouble and expense to the greatest possible extent.