An IRS audit may not be entirely avoidable, but it helps to know the most obvious triggers. It’s always important to be diligent about retaining records that prove of what you report. Here are 6 red flags that increase your chances for an IRS audit:
- Inaccurate or mismatched information – Double check the numbers on your return, making sure that your social security number is recorded correctly, and that the income stated on your Form W-2 and/or Form 1099 is the same amount reported on your tax return. If reporting alimony income or a deduction, the amount you report should be the same amount that your ex-spouse reports.
- Uncommonly low salary for an S corporation – Many small business owners run expenses through their businesses. However, if a salary paid to a principal of the company is too low, the IRS may want to know more about it.
- Relatively large business expenses – High amounts spent on meals and entertainment may be scrutinized based on your type of business and/or income. Additionally, extremely high percentage of business use for a vehicle looks suspicious.
- Above average charitable donations – If donations are higher than traditionally expected relative to your income, the donations may cause a red flag.
- Reporting losses from hobby-related businesses – Horse breeding and horse racing are examples of types of businesses that frequently receive audits. Remember, you must report all income you receive from a hobby, and can only deduct expenses up to the amount of the income you receive.
- Any type of home office deduction – Proper deduction for a home office depends on using a room exclusively for business. That means that an extra bedroom used for guests, or as an extra TV room don’t qualify. The IRS recognizes that exclusive use of a room for business is often difficult to justify.
To minimize the risk of an audit, talk with a Salmon Sims Thomas tax advisor.