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Updated by Kevin Thorn on Nov 22, 2017
Headline for Red Flags That Lead to Audits
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Kevin Thorn Kevin Thorn
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Red Flags That Lead to Audits

No one wants to be audited, as an audit can be costly, burdensome, and can result in a big financial penalty at the end. The good news is, the chances are pretty small you'll come under investigation by the IRS. The bad news is, there are certain behaviors you could do that could trigger this type of investigation. Check out this list from a Boston tax lawyer of top red flags that could prompt an audit so you can avoid behaviors that might trigger the IRS to take a second look at you.

1

Claiming a miscellaneous deduction

If you list too many unspecified deductions on a schedule A that you submit with your tax returns, this could prompt the IRS to look closely at what exactly you're deducting and why. Instead, use your Schedule C to list what your deductions are within their relevant categories -- and make certain to include explanations for any deductions that the IRS may find suspicious or odd.

2

Information that doesn't match with what other sources provided

When your claimed income doesn't line up with what was reported on your 1099s or W2s, this will prompt the IRS to take a close look at the discrepancy. Why are others reporting they paid you income, but you're not showing a record of it? The IRS is going to want to know the answer to this question.

3

Deductions that are much higher than they should be

If you claim a limited income but you deduct for really large charitable contributions or deduct a huge amount of mortgage interest, the IRS will see this as a red flag that you're either underestimating what you make or are overestimating what you can legally deduct. After all, how could you have such high deductions when your income wouldn't provide you with that much cash to give to charity or to spend on a house?

4

Claiming business losses from activities that may actually be hobbies

While you can claim business losses if you're legitimately running a company your hobby is not actually your business in almost all cases– and you cannot deduct the costs of engaging in your leisure activities just by claiming they're expenses you incurred to try to start a non-profitable business.

5

Big deductions for business meals and entertainment

Costly meals out or expensive entertainment expenses aren't necessarily legitimate business expenditures that that you can always deduct for, even if you actually did enjoy a $500 dinner. If you are claiming entertainment expenses the IRS thinks are unreasonably high, you could be asking for the IRS to take a second look at your entire return.

6

Deductions for non-cash gifts to charity

Don't overestimate the value of that old sofa or your ratty old shirts that you took to Good Will, unless you want the IRS to examine your return with a suspicious eye.

7

Home-based business deductions

If you're claiming a big deduction for your home office or other big business expenses, the IRS is going to look carefully at whether these deductions seem legitimate and whether your home business is actually producing any income for you or is just serving as a way to claim deductions you aren't actually owed. It is not uncommon to be audited for a home business, so be sure to maintain thorough and accurate records.

8

Declaring foreign accounts

There are a huge number of disclosure requirements for offshore investments that you must comply with. Unfortunately, when you let the IRS know you've invested offshore, this could cause your return to face greater scrutiny since the IRS may think your offshore investments are part of tax-evasion efforts. Despite the risk, you face a much greater threat of potential consequences if you fail to report offshore investments, so be sure to comply with the rules for reporting these accounts to the IRS.