Tax watchdogs monitor IRS audits and poll many organizations of tax preparers and accounting professionals in an attempt to identify the top IRS audit triggers each year. The list for 2015 has some newcomers. The primary caveat to all of this information is simple: if you have a legitimate expense or deduction, take it. You should have no fear of an IRS audit if the numbers reported in your return are factual and well documented. That being noted, here are several of the deductions that seem to trigger IRS automated systems:
- Spousal and Child Support – especially in the year following a divorce. The IRS may compare the amount claimed by the spouse paying the support with the income reported by the spouse receiving the support. The numbers should match. The payor of child support may not deduct this from their taxes, and this is a common mistake. Claiming a dependent that your former spouse also claims will cause an issue for one or both parties. Divorce agreements should clearly establish these issues.
- Home Based Business Expenses – Those who have businesses based in the home, especially those who claim a home office exemption
- Rental Losses – California real estate is a world unto itself, and the IRS may not understand how a taxpayer could and would rent out a property each year that continues to provide a loss. Be prepared to document rental losses or face an audit.
- Day Traders – the IRS prefers to classify income and losses from day trading as “investment income” as it results in a higher net tax burden. Those who claim day trading as their primary business and file a Schedule C should be prepared for a few questions from the IRS.
- Health Care Expenses that are Out of Proportion to Statistical Norms – If you are younger than 65, your medical expenses must almost always exceed 10% of your adjusted gross income in order to be claimed.
- Failure to Pay Self Employment Tax – This provides contributions you otherwise would have made as an employee to Medicare and Social Security. Do not attempt to side step self employment tax, even if you have a modest income from a side job.
- Work Related Expenses – Especially if you received reimbursement from an employer for part or all of your expenses. This is an area where less than scrupulous taxpayers may take a few liberties from time to time.
- High Charitable Donations – there is a “bell curve” that is used by the IRS to calculate statistical means and averages for gift giving. If your return falls outside of statistical norms for your income bracket, it may trigger an IRS audit.
It is important to note that any one or more of these issues does not automatically expose a US taxpayer to an IRS audit. The IRS uses sophisticated automated programs to identify returns for audit, and the issues above are simply common questions contained within IRS audit requests. If you have been contacted for an IRS audit you should contact the experienced tax attorneys at Allen Barron for a free consultation at 866-631-3470.