Red Flags Could Increase Chances of IRS Audit

IRS AuditIf you’re like most Americans, the thought of going through an Internal Revenue Service (IRS) audit is enough to cause a spike in your blood pressure.  During 2015, nearly 1.2 million individual tax returns were audited by the IRS.  Overall, your chances of undergoing an audit are less than 1%, but for taxpayers with incomes over $200,000, they are more than double. There are various red flags that can trigger an IRS audit— a few of the more common reasons are below.

Taking larger charitable write-offs and higher-than-average deductions may lead the IRS to investigate further.  The IRS compares the charitable deductions you take against other taxpayers with similar incomes.  If your charitable deductions are substantially higher than average, you may be more susceptible to an audit.  Taxpayers who take large deductions on their Schedule A for items such as medical expenses, home mortgage interest, or paid taxes also may be at higher risk for an audit.

The IRS also closely watches individual returns that claim deductions for business meals and entertainment.  Many taxpayers are unfamiliar with the strict rules that regulate what can qualify as a meals-and-entertainment business-related expense.  Auditors can challenge what is deemed a “necessary” business expense, so it is important to keep detailed records for any items deducted under meals-and-entertainment expense.

If you include a Schedule C, your tax return may be subjected to additional scrutiny, particularly if there are large losses that the IRS may view as potentially related to a hobby rather than a business.  If you have had multiple loss years, the IRS will use these criteria to determine your intentions to operate a profitable business.  If the IRS determines your business to be a hobby business, any losses related to the business would be disallowed.  You should make every effort to take a professional approach to business operations and keep accurate and detailed records of business expenses to ensure losses are not disallowed.

In recent years, the IRS has begun cracking down on unreported overseas bank accounts.  Along with the increased risk of an audit, hefty penalties of up to the greater of $100,000 or 50% of the total balance of the foreign account potentially can be levied upon the taxpayer, with the highest penalties for those found to be in “willful violation” of these reporting rules.

While the odds of an IRS tax audit remain low, knowing the red flags and making sure you don’t trigger them may decrease the likelihood you’ll be audited.  If you would like to discuss additional ways to lower your audit profile, or if you need help with a current IRS exam, contact one of our executives below, (800) 270-9629.


Shannon Euart

Shannon Euart

Senior Manager

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