- Low or No Reported Income – So much for the Willie Sutton theory. Low incomes receive more scrutiny to verify that the Earned Income Tax Credit is not being falsely claimed and that income is not being underreported. Over 5% of the taxpayers reporting no income in 2014 were audited by the IRS.
- Mismatching Income – Discrepancies between W-2/1099 forms and your reported income are easily picked up by the IRS computers. Make sure that all of your taxable income is reported and matches your forms.
- Disproportionate Charitable Contributions – Expect an audit if you made contributions that are out of line with your average income range, failed to file a Form 8283 with your larger donations, or made a one-off large contribution such as a donation of property to a charity.
- Home Office Deductions – The definition of a “home office” is stretched often enough that it tends to receive a closer examination. Make sure you meet the “exclusive and regular” business use requirement and be prepared to prove it.
- Calling a Hobby a Business – Continually unprofitable home businesses are likely to be considered as hobbies by the IRS (and really should be, if the business is truly unprofitable). The general rule is that the venture must earn a profit in three out of the five previous years to be truly considered a business.
- Holding Foreign Bank Accounts – Thanks to the Foreign Account Tax Compliance Act, overseas accounts require notifications to the Treasury Department and other paperwork depending on the size and nature of the accounts. Make sure all necessary paperwork is filed in a timely fashion – and even then, expect an audit if your account resides in a known tax haven.
- Excessive Business Deductions – IRS agents are quite adept at spotting sketchy business deductions where lines are blurred between personal and business expenses or the amounts seem excessive. Be prepared to defend all the business deductions you claim.
- Multiple Deduction Claims for Children – Divorced couples do not always agree on who should claim their children as dependents, and only one can do so. If the same child’s Social Security number ends up on two different returns, guess what will happen.
To any IRS agents who may be reading this article, we actually appreciate your service…and we were just kidding about the Willie Sutton remarks. Please don’t audit us.