How to Avoid Red Flags for an Audit

The information in your personal tax return is critical in determining whether the IRS may choose to audit your return. One of the ways your tax return can be selected for an audit is through computer screening. The IRS computers can pick up certain “red flags” on your return. Here are some items that can be “red flags” for an audit

General Red Flags:

  • Filing your tax return really late
  • Filing an amended return with some substantial changes to your original return
  • Reporting over the top deductions for mortgage interest. For example, small income but a large mortgage interest, can be a red flag
  • You’ve been audited before
  • High income individuals
  • Claiming the Earned Income Tax Credit
  • Claiming the Adoption Credit
  • Filing a handwritten, sloppy return
  • If you are self-employed or own your own business, certain items on your Schedule C can act as red flags.

Schedule C Red Flags:

  • Not reporting all income.
  • Reporting little income but much larger expenses
  • Reporting a high volume of cash reporting without having Form 1099s to show
  • Reporting business losses year after year. You must show a profit in 3 out of 5 years, including the current year.
  • Reporting expenses for an activity which is really a hobby and not a bona fide business.
  • Reporting certain expenses that appear substantially larger than expected for similar businesses. For example, you are a hairdresser who works in a salon but you report large mileage expenses.
  • Reporting large miscellaneous expenses
  • Reporting large travel, meals and entertainment expenses
  • Reporting large health care expenses
  • Reporting large contractor expenses
  • Using round numbers for all expenses. There is a good chance the numbers are made up or not accurate.
  • Deducting home office expenses using a high percentage of the total square footage of your home.

At UnTax, we frequently give this advice time: be accurate, be honest, and be diligent about record keeping. However, doing all of these things doesn’t always prevent an audit. When you hear from the IRS that you are being audited, call us immediately. We can help you get your audit resolved promptly, with as little stress as possible.