We have found that the most common question in an IRS audit is, “Why did they pick my return to audit?” Here is a list of the top five (no – make it 6) red flags that we have seen.
- High Income - As we all know, the IRS cannot audit everyone, so their computer systems are configured to provide their auditors with a list of those returns most likely to generate the most revenue for them if audited. They want to audit someone that is able to pay them, and typically will not audit an individual with lower income.
- Self Employed – Errors and overstated deductions are very common with regard to self-employed individuals.
- High Charitable Contributions – This is an area where the IRS has seen a lot of abuse and inflated deductions. Make sure that all of your contributions are well documented.
- Rental Losses – Many rental losses cannot be deducted, so be very careful in this area, as excessive losses here tend to raise the eyebrows of the government.
- 100% Vehicle Business Use – This is a HUGE red flag, as it is almost impossible that the business vehicle was not used at least some for personal purposes.
- High Business Meals and Entertainment Deductions – Again, document, document, and then document!
Our biggest and best piece of advice with regard to taxes are to make sure to work with a tax professional to prepare your tax return every year.