Wondering if your personal tax return might get audited? Do you know what the IRS looks at?
Obviously, the IRS won’t give out a list of items that they look for, but based on audits, here are some known ‘red flags’ (for some items, I have a free brochure – click on the link for the PDF in a new window):
- Large Hobby Losses – having wage income and a large loss on a Schedule C especially for an activity that sounds like a hobby instead of a business. See Hobby vs. Business
- Owning a cash-intensive small business such as hair/nail salons, car washes, taxi/limo service, etc.
- Claiming 100% business use for a vehicle, especially if it is your only vehicle. See Business Use of Vehicles
- Large write-offs of business meals/entertainment or travel on Schedule C or Form 2106 for Unreimbursed Employee Expenses.
- Rental losses for Real Estate Professionals or individuals with large wage (W2) income. See Rental Income and Expenses
- Taking larger deductions than your income allows – especially for taxes paid or real estate interest. Backup documents for these items will probably eliminate any IRS problems. See Itemized Deductions Homeowners
- Foreign bank accounts, especially in ‘tax havens’ that don’t disclose account owners. The IRS has made this a high priority for a few years.
- Operating an S Corp or LLC where you draw a minimal salary. The IRS has said that owners of these businesses should draw a ‘reasonable’ salary and people have been passing profits through to their individual returns to avoid paying the match on Social Security & Medicare taxes.
- Using your Home as a Business – people try to write off a lot of items, but only some are allowed. See Business Use of Home
These are some of the items that have been looked at during audits over the last few years. As always, keep adequate records to support your deductions. See Recordkeeping for Tax Purposes.
With the tax season rolling along, you should discuss any issues you many have with your tax preparer. I’m available if you need help with your taxes, or have any comments or questions.
Thomas C. Hodge, CPA
The Hodge Group
3040 N. Menard Avenue
Chicago, IL 60634