How to Reduce Your Chances of an IRS Audit

It is that time of the year again --- tax season. The annual ritual is dreadful enough when it goes smoothly so the last thing you want is to be audited. While the average taxpayer has a 1 in 160 chance of being audited, there are several areas the IRS scrutinizes that can dramatically increase your odds. The following is a list of ten areas attracting the most IRS attention.

1. Not Reporting Taxable Income: Businesses are required to report certain expenses to you and the IRS. They are reported to us via W-2 or 1099 forms. The IRS will match these amounts with the amounts reported on your tax return. Discrepancies increase the chance of an audit.

2. Taking an Alimony Deduction: Alimony is no longer deductible under the new tax law, but both the payor and recipient are required to report it. Discrepancies between these amounts increase your chances of an audit.

3. Running an All Cash Business: Certain businesses such as restaurants, ride-sharing, taxis, hair salons, … etc. receive a high percentage of payments in cash. The opportunity to underreport income causes the IRS to scrutinize these businesses more than most. Owning or working for these types of businesses raise your changes of being audited.

4. Writing off a Hobby Loss: Is it a hobby or a business? It is an important question because business losses are deductible while hobby losses are not. Keep in mind, the goal of a business is to earn a profit. If you report losses in three of the last five years, the IRS may view your business as a hobby and disallow the business deductions.

5. Claiming 100% Business Use of a Vehicle: This is another area considered ripe for abuse. If you claim all vehicle miles were 100% business use, make sure to document your mileage and own another car.

6. Deducting Unreimbursed Business Expenses: Most employees are reimbursed for business expenses. If you aren’t, the deduction is only allowable to the degree unreimbursed expenses were greater than 2% of your AGI. Deductions greater than average raise red flags at the IRS.

7. Claiming a Home Office Deduction: To claim this deduction you must have a dedicated space in your home that is used exclusively for work. The rules allow you to prorate a portion of home expenses such a utility bills. Greater than average deduction amounts raise red flags at the IRS.

8. Claiming Large Charitable Donations: Claiming above-average deductions compared to others in your income range draw scrutiny. The key is to keep good records as proof of your donation.

9. Deducting Entertainment Expenses: The new tax law does not allow entertainment expense deductions. However, travel and meals are at least partially deductible. Make sure to keep good records on the amount spent, place you met, who you met with and the purpose of the meeting to ensure deductibility.

10. Not Reporting a Foreign Bank Account: In the past, one could avoid taxes by establishing a bank account outside the US unknown to the IRS. They are cracking down on these attempts to hide money. If you have over $10,000 collectively in foreign accounts during the past year, you are required to file special forms to report them by April 15^th. Contact your local financial professional or CPA for more on the filing requirement.