Receiving a letter from the IRS stating that your information “does not agree” with their records is a daunting prospect. In short, you’re being audited. Although the IRS audits less than 1% of all tax returns, the following are red flags for a tax audit and could increase your chances of being scrutinized.
The IRS often audits high-income taxpayers as they are likely to owe more money, making each audit potentially more profitable for the IRS.
Typically, taxpayers earning more than $200,000 a year have a higher chance of being audited, with those earning over $1 million a year at the greatest risk.
Just as high income can draw IRS attention, so can reporting no income. This is because individuals with low income are likely to claim the Earned Income Tax Credit (EITC). The IRS estimates that roughly 20% of all EITC payments are fraudulent each year, so low-income filers can expect extra scrutiny.
Business deductions must be “ordinary” and “necessary” for your business. An “ordinary” deduction is common in your trade, while a “necessary” deduction is helpful for your business. Before filing, consult a tax attorney about any questionable business deductions, particularly if they are substantial.
The home office deduction often attracts IRS scrutiny. According to IRS law, you can only claim this deduction if you regularly and exclusively use the space as your home office, and it is your principal place of business.
Self-employed individuals file Schedule C to report business income and losses. Claiming excessive losses can raise a red flag. The IRS may classify your business as a hobby if it isn’t profitable in at least three out of five years, which can result in penalties, interest, and additional taxes.
If you suspect that one of these red flags for a tax audit could apply to your situation, you might want to consult a tax professional for advice before filing. Jeffrey L. Cohen, Attorney at Law, regularly advises businesses and individuals in Georgia on tax issues. If you have a question, call 404-937-1414 today for a free phone consultation or complete an online form.