It’s many people’s worst nightmare: you receive a letter from the IRS informing you that information you submitted “does not agree” with information the IRS has received from other sources. What you have just been told is that you are being audited. Although the IRS audits less than 1% of all tax returns, these red flags increase your chances of falling under the IRS microscope.
You Have a Very High income
The IRS focuses most of its audits on high-income taxpayers, which shouldn’t be surprising. High-income people will generally owe more money, so each audit can potentially fatten the IRS coffers in a big way.
How high does your income need to be to face extra IRS scrutiny? Typically, taxpayers who make more than $200,000 a year have a greater chance of being audited, and those who make over $1 million a year have the greatest chance.
You Have No Income
Just as a high income draws IRS scrutiny, reporting no income is also a giant red flag. The reason low-income people fall under the IRS microscope is that they are likely to claim the Earned Income Tax Credit (EITC). The IRS estimates that about 20% of all EITC payments are fraudulent each year, so low-income filers can expect to draw extra scrutiny.
You’ve Claimed Too Many Business Deductions
Business deductions must be both “ordinary” and “necessary” for your business. A deduction is ordinary when it is accepted and common in your trade, and a deduction is necessary when it is appropriate and helpful for your business. A business expense doesn’t have to be indispensable to qualify. For example, a dentist’s office can run perfectly fine without magazines in its waiting area, but you can nevertheless claim magazine subscriptions as a business expense.
IRS laws and regulations can be difficult to interpret, so you should run any questionable business deductions by a tax attorney before filing, especially if your business deductions are large.
You Claim a Home Office Deduction
Of all deductions, nothing draws IRS scrutiny quite like the home office deduction. According to IRS law, you can only claim a home office deduction if you regularly and exclusively use the space for your home office. For this reason, you can’t claim your kitchen table as your home office, since you do other things at the table.
You also must use your home office as your principal place of business. Generally, this means that you must regularly and substantially conduct business from your home office, though you can also conduct business from other locations.
You Report Schedule C Losses
Self-employed individuals file Schedule C to report their business income and losses. Too many claimed losses will raise a red flag for the IRS. In particular, the IRS will look to see whether your business is really only a hobby. According to IRS law, a for-profit business must be profitable in at least three of five years. If you suffer losses year after year, the IRS might classify your business as a hobby, which can result in penalties, interest, and additional taxes.
Contact a Georgia Tax Lawyer Today
Before submitting your tax return, you should consult with a tax attorney to make sure everything is in order. Jeffrey L. Cohen, Attorney at Law, regularly advises businesses and individuals in Georgia on tax issues. If you have a question, call 404-814-000 today for a Free Phone Consultation or complete an online form.
