How to Avoid Being Audited by the IRS

A hospital groundskeeper came across two medical doctors in white coats searching through one of the clinic’s flower beds.

“Excuse me, gentlemen,” said the gardener. “Have you lost something?”

“Not at all,” replied one of the doctors. “In a few minutes we’ll be doing a heart transplant for an IRS auditor and we’re just looking for a suitable stone.”

Heh.

You know, nobody likes being audited — especially me. (I realize I’m probably on on the IRS short list, after that joke.)

In most cases, Uncle Sam has three years to audit a tax return once it has been filed. However, the statute of limitations increases to six years if you’ve omitted more than 25 percent of your reportable gross income on your return.

And even though the odds of being audited are relatively long — roughly 1 in 100 — that risk increases dramatically for folks who unintentionally attract the attention of those heartless tax inspectors by waving the following red flags identified by Kiplinger:

  • Math errors. While these usually don’t automatically trigger a full-blown audit, they draw additional attention to your return.
  • Claiming the home office deduction. One of the biggest flags because the deduction is so often misapplied.
  • Taking large charitable deductions. Deductions for charity should be proportionate to income.
  • Engaging in large currency transactions. Transactions greater than $10,000 draw the most scrutiny.
  • Writing off losses for a hobby activity. You can deduct hobby expenses, but not losses.
  • Claiming rental losses. According to Kiplinger, especially “losses written off by taxpayers claiming to be real estate pros.”
  • Deducting business meals, travel and entertainment. The IRS knows these write-offs are ripe for abuse.
  • Claiming 100% business use of a vehicle. Without detailed records for proof, this claim is a tough sell.
  • Making too much money. A household income of $200,000 quadruples your audit risk.
  • Running a cash business. The IRS asserts that those who get paid primarily in cash are less likely to report all their income. Ya think?
  • Failing to report a foreign bank account. Of course, first they have to discover it; if they do, the penalties are huge.
  • Failing to report all taxable income. Always claim the income listed on all of your W-2 and 1099 forms. Well, unless it’s a mistake.

Keep in mind that an IRS audit isn’t the end of the world — especially when you have the records and documentation to back up all your claims.

However, that’s no reason to increase your risk of being subjected to a potentially painful and time consuming government probe by waving multiple red flags like a matador at a bull fight. Especially when you consider that those who end up in the ring sometimes get gored by the horns.

Photo Credit: SubtlePanda

Comments

  1. 1

    tracee says

    being audited is nooooooooo fun. due to a big year of buying a house, having a baby and daycare expenses, and going to grad school i got a fairly large return one year….followed by an audit. it was not fun, but i hadn’t made any mistakes so that was good. hopefully that was my one time and they are done with me.

    • 2

      says

      Not to frighten the horses, but I’ve heard another red flag for an audit… is being previously audited.

      However, I suspect that flag only applies if irregularities were found. Since you got a clean bill of health, you’re unlikely to be audited again.

    • 3

      Len Penzo says

      I’ve never been audited yet, but I have gotten letters from the IRS on two occasions saying I made math mistakes (which they corrected). Get this: In both cases the errors were in my favor.

  2. 4

    Christie says

    Another big red flag is claiming a child that you did not claim previously, unless it’s a child who was just born that year.

    • 7

      Len Penzo says

      I know. It’s impossible to prove a negative. Apparently, the IRS has a handbook that helps their examiners “cross-examine” those being audited. I guess they try to trip folks up with detailed lines of questioning.

    • 9

      says

      It’s worse than that. Since there are special tax courts, the IRS is effectively the prosecutor, judge and jury too.

      If the tax court rules against the IRS – a rarity – my understanding is the IRS does NOT have to follow the ruling as a precedent. They can keep doing the same ruled-against behavior to the next person, and the next… forcing each person to individually appeal their case to the court – if you have the time and resources of course.

      • 10

        Len Penzo says

        That is scary stuff, DC. I guess the lesson here is: make sure you are honest on your returns. The odds may be long, but if you do get snared by an tax auditor, you’ll have nothing to fear if you’ve you’ve got nothing to hide. (That’s not to say that the process won’t be necessarily painful.)

  3. 11

    says

    I was audited 30+ years ago. It was a routine audit, but I suspect my CPA was on the IRS hot list. Thankfully, I have never been audited again. I did replace my CPA though.

    • 12

      Len Penzo says

      I think DC probably hit the nail on the head … although I can’t prove it, I suspect being audited and given a clean bill of health pretty much immunizes you from future examinations (barring some blatant red flags being waved).

  4. 13

    Jambalaya says

    What about presidental administrations that use IRS audits as a weapon to intimidate? Check into it. Scary stuff.

  5. 15

    says

    Pfew, I’m ok on all fronts. I know a lot of bloggers who have aggressive accountants that talk them into writing off the home office deduction. I don’t think it’s worth it.

    • 16

      Len Penzo says

      I’ve taken the home office deduction, but I can truly justify it. Still, the amount of the deduction is so small — if I remember correctly, I think this year I got to write-off $24 — I can’t see why the IRS would find it worth their time to bother investigating.

  6. 17

    says

    “The hardest thing in the world to understand is the income tax.” – Albert Einstein, physicist.

    Well! It may be connected to his theory of relativity but, being a physicist that he was, he didn’t think of the U.S. tax system in reverse.

    It would have been a lot easier for him if he understood two things:

    The more you make, the less you pay – ever heard of loopholes?

    The less you make, the more you pay – never heard of loopholes?

    Don’t try to fool IRS

    Al Capone was not sent to jail by Eliot Ness.
    Al Capone was sent to jail by IRS.

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