“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.”
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% 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 followingred 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