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Red Flags That Could Trigger an IRS Tax Audit

Audits are down, but these items could put your return in the crosshairs


You’ve filed your 2017 tax return, or are about to, and may have one nagging question: Am I going to be audited by the Internal Revenue Service (IRS)? Even the prospect of an IRS tax audit can raise your blood pressure.

The good news is that your chances of getting audited are very, very low. Last year, the IRS audited just 1 in 160 individual tax returns, the lowest since 2002. But not all tax returns are scrutinized equally, and certain ones raise red flags with the IRS.

Below are a few red flags that could trigger an audit. If your return has any of them, be sure you have the proper documentation and information in case the IRS comes calling.

Prepaying State Income Taxes in 2017

Since the 2017 tax law will cap the deductibility of state and local income, property and sales tax at $10,000 in 2018, many taxpayers tried to prepay their 2018 state income taxes in December to get the deduction for their 2017 returns. But Congress caught on to this and specifically prohibited it. The fate of prepaid 2018 property taxes is not as clear, though, and many advocates believe the deduction is proper for 2017 returns.

Itemized Deductions That Are Outliers

The IRS uses computer scoring to select many returns for audit, giving each return a numeric score. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review. That means if items on your return are “outliers” compared to the national average — such as higher itemized deductions compared to income or unusually large charitable contributions —the return is more likely to be selected for audit.

A few examples of the average amount of deductions people with adjusted gross incomes of $50,000 to $100,000 took on their 2014 tax returns (the most recent data available from the IRS) if they claimed these particular write-offs:

  • Medical Expenses: $9,614
  • Interest: $7,553
  • Taxes: $6,679
  • Charitable Contributions: $3,147

Self-Employment Income

With the increased popularity of services like Uber and Airbnb, more people have a part-time side hustle and will owe self-employment taxes. Generally speaking, if you earned more than $400 from self-employed work, including freelance and consulting work, you will owe Social Security and Medicare taxes on those earnings.

The income is reported to you using Form 1099 and the IRS receives a copy of that form, so if your version of what you earned doesn’t match the 1099 figures, it may result in a follow-up notice from the IRS.

More than half of the nation’s $458 billion “tax gap” — what the IRS deems to be the amount of true tax liability that is not paid voluntarily and timely — is attributable to underreporting by self-employed individuals. Since the IRS doesn’t have independent means to verify amounts reported on Schedule C (Profit or Loss From a Business), these returns are likely audit targets.

Home Offices

Since the 2013 tax year, the IRS has offered a simplified option for claiming a home office deduction. If you have a legitimate home office, you can write off $5 per square foot up to a maximum of 300 square feet, or $1,500, while still being able to claim expenses like mortgage interest on property taxes in full on Schedule A. Taxpayers using the regular method must determine the actual expenses of their home office (they include mortgage interest, insurance, utilities, repairs and depreciation) and are based on the percentage of the home devoted to business use.

Because the tax savings caused by using the regular method over the simplified method are likely to be insubstantial, the IRS is now wary of taxpayers who calculate their own home office deductions.

Rental Properties

Individuals with rental properties can receive more advantageous tax treatment if they can prove they are real estate professionals. If you qualify, you can deduct losses from the properties and other real estate against your other unrelated income, which is a significant benefit. There are rules to claiming to be a real estate professional, however.

You would need to spend a minimum of 750 hours a year (14 hours a week for 52 weeks) working on the rental property. If renting property is not your full-time job, the IRS may want to do so more digging to see if you meet the standards to take the deduction.

The Dirty Dozen

Every year, the IRS issues its equivalent of the FBI’s Most Wanted list, which it calls the “Dirty Dozen.” These are, the IRS says, “common scams that peak during filing season.” Needless to say, no taxpayer wants to have a return with any of the most wanted items on it, especially since these scams can increase your likelihood of being audited. Among the latest on the Dirty Dozen list: return preparer fraud (allowing a paid preparer to claim false positions to inflate refunds), frivolous tax arguments, bogus tax credits, donations to fake charities and padding deductions.

Bill Smith
By Bill Smith
Bill Smith is a managing director of the national tax office for CBIZ MHM, a full-service accounting provider and business consulting firm.

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