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% 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
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.
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.
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.
Then, a few years ago the state auditors contacted me because I had underpaid my California taxes thanks to an error in the TurboTax software, which failed to account for a change in California tax law. The bad news: there was an underpayment in the neighborhood of $3000. The “good” news is TurboTax paid the interest and penalty.
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.
I’m scared to death of this.
“We think you earned money from an extraterrestrial being, show us the 1099.” – “Well, I can’t because it doesn’t exist!” I proclaim. They respond: “Prove it.”
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.
“guilty until a person can prove himself innocent.” probably the best reason of all reasons to get rid of the income tax.
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.
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.)
What about presidental administrations that use IRS audits as a weapon to intimidate? Check into it. Scary stuff.
Yes, I am well aware of at least one administration that was caught doing that to organizations with conservative and/or libertarian leanings back around 2010 or so; it’s chilling.
Nobody was ever punished for that either. (Imagine that.)
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).
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.
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.
I only know of my sister being “audited” when she purchased a home with the new homebuyers credit was being given out. She just had to prove purchase with documents.
That’s why I always keep every document for backup in case there’s an audit. It is better to be prepared than not at all.
90% of families claiming the child adoption tax credit are audited. Adoption is a wonderful, rewarding way to build family; but it can also be a gruelling process! After all of the expenses, tests and probes that are part of the adoption process, an IRS audit seems incredibly unjust and inhumane.
“Adoption is a wonderful, rewarding way to build family.”
Speaking as an adopted child myself … I totally agree with you, Andy!
Years ago, I was audited in person (not just by letters) because my wife ran her piano studio as a cash business. She kept good records so that was not found to be a problem, but the auditor was unaware of a new deduction that had been added in the tax code late that tax that year. She allowed it, of course, but was a little embarrassed, I think. I sympathized with her and said so. The rest of the audit was perfunctory and no other deductions were questioned.
“Grandfather’s” advice: Treat all authorities with quiet good nature and you will often fare better – warning tickets rather than a costly summons, for example. Remember, both of you may be under some stress.
50 years ago my father was a sculptor. When he worked full time for GM, modeling full scale cars in clay, a tax preparer decided he should depreciate his tools. He left that job and continued sculpting and continued to depreciate his tools. This made tax preparation overly complex. To make a living he had many part time teaching jobs. He had to sculpt and exhibit to maintain his professional standing to teach at college level, but barely made expenses from actual sales. The teaching jobs always deducted taxes. Though we hovered around the poverty line, the IRS audited him, and fined him over $1000 in “taxes and penalties”. The IRS assumed he was lying about using the house for a studio (he used the entire cellar, the front room on the main floor as the light was good, and side yard in the summer, but only reported the cellar) and underreporting the amount of money he made on sculpture, (which of course he couldn’t prove). He was always honest and respectful, but got raked over anyway.
Your poor dad, Olivia! Yes … yet another case of being found guilty until proven innocent.