IRS Red Flags: Top 5 Reporting Tips That May Spare You from a Tax
By Barbara Pronin
The IRS audits only slightly more than 1% of
all individual tax returns annually. So the chances you will be audited are
slim. But, say the audit-watchers at Kiplinger.com, there are several hot spot
areas on your return that can raise the chances of IRS scrutiny:
- Making too much money – People with incomes of $200,000 or
higher had an audit rate of 3.93 percent, or one out of about 25 returns. The
audit rate drops significantly for filers making less than $200,000, and the
majority of them are conducted by mail. Of course you don’t want to earn less
money. But understand that the more income you report, the more likely you'll
hear from the IRS.
- Failing to report all taxable income – The IRS gets copies
of all 1099s and W-2s you receive, and their computers are pretty good at
matching the forms with the income reported on your return - so make sure you
report all income.
- Taking large charitable deductions – Charitable
contributions are a great tax write-off and worthwhile besides. But claiming
disproportionately large deductions compared with your income raises a red flag
with the IRS. Be sure to keep all supporting documents, including appraisals for
donations of valuable property.
- Claiming the home office deduction – This can be a great
deduction if you qualify. But to qualify, you must use the space in one room of
your home exclusively and regularly as your principal place of business – and
you must be able to prove it.
- Deducting business meals, travel and entertainment -
Schedule C is a treasure trove of tax deductions for self-employed people. But
it's also a gold mine for IRS agents, who know from experience that
self-employeds sometimes claim excessive deductions. Big deductions are ripe for
audit, so keep detailed records and receipts, including names of those you
entertained and the nature of each business meeting or discussion as well as the
need for related travel expenses.