Top Red Flags That Trigger a Tax Audit
As you prepare your taxes each year, the thought of a tax audit may linger in the back of your mind. While the likelihood of being audited is relatively low (less than 1% for individual taxpayers), there are certain red flags that can increase your chances of being selected for an audit. In this article, we'll explore the top red flags that trigger a tax audit so that you can be better prepared and avoid any potential issues.
1. High Income
Higher income earners are more likely to be audited than those with lower incomes. According to the IRS, taxpayers earning over $1 million have a 10.6% chance of being audited, while those earning between $200,000 and $1 million have a 2% chance. This may be due in part to the fact that higher earners tend to have more complex tax returns that are more likely to contain errors.
2. Claiming Business Losses
If you’re a business owner, claiming losses on your tax return may raise a red flag. While it’s not uncommon for new businesses to operate at a loss in their early years, the IRS may take a closer look if you claim losses for several years in a row. Make sure you can provide documentation to support your losses, and be prepared to show that you’re working to turn a profit.
3. Unreported Income
Failing to report all of your income on your tax return is a surefire way to trigger an audit. This includes income from side hustles, freelance work, and other sources outside of your regular job. Keep detailed records of all of your income throughout the year, and don’t forget to report all of it on your tax return.
4. Large Charitable Donations
While charitable donations are generally tax deductible, large donations may draw scrutiny from the IRS. If you’re claiming a substantial donation, be sure to have documentation from the charity to back it up. The IRS may also look at your overall giving history, so keep records of all charitable donations you make throughout the year.
5. Home Office Deductions
Claiming a home office deduction on your tax return can be a red flag, especially if you’re a wage earner and not self-employed. While it’s perfectly legal to take this deduction if you legitimately work from home, be prepared to show that you meet the IRS’s strict requirements. These include using your home office exclusively for work and doing it regularly.
6. Claiming Large Business Expenses
If you’re self-employed, claiming large deductions for business expenses may raise a red flag. This is especially true if those expenses seem high compared to your overall income and industry standards. Keep thorough records of all expenses and be prepared to provide documentation to support them.
7. Filing Late or Not at All
Filing your tax return late or failing to file altogether can generate extra scrutiny from the IRS. This is especially true if you owe taxes, as the IRS may view late filing as an attempt to avoid paying. Make sure to file your taxes on time each year, and if you can’t pay what you owe, work with the IRS to set up a payment plan.
8. Math Errors
Simple math errors on your tax return may seem harmless, but they can lead to an audit. Be sure to double-check all calculations and use tax preparation software to help catch any mistakes. Even a small error can trigger an audit and result in extra scrutiny.
In conclusion, while the likelihood of being audited is relatively low, it’s important to be aware of the red flags that can increase your chances. Keep thorough records, be prepared to provide documentation to support your deductions, and file your taxes on time each year. By following these steps, you can avoid any potential issues and ensure that your tax return is accurate and complete.