T’is The Season: IRS Audit Red Flags

BOSTON (CBS) – The IRS does not like tax fraud. They have a system that can easily red flag a tax return for audit. You can avoid an audit if you do not cheat or do something dumb because you are in a hurry. Here are my top 10 red flags.

1. Not reporting all of your income: The IRS cross checks your income sources with 1099s and W-2s. If your income has dropped that may be a red flag. Do not under report your income, no matter how tempting.

2. Claiming large charitable deductions: The IRS knows what the average donation is for a person in your income bracket. So if indeed you made a large donation last year be sure to have proper documentation.

3. Earning a lot of money: Over $100,000. Indeed, we all want to earn more money but if it is over $100,000, you are 5 times more likely to be audited.

4. Taking higher than the average deductions. If the deductions on your return are disproportionately large compared to your income, the IRS audit formulas will go “tilt”. So if you have large medical deductions be sure you can prove them if need be.

5. Home Office deduction: The IRS is always interested in this deduction, because history has shown that many people who claim a home office basically shouldn’t. If you work out of your bedroom or dining room, the deduction may be invalid.

6. Business meals, travel and entertainment: Schedule C is filled with tax deductions for the self-employed. And the IRS has figured out that often some self-employed individuals tend to claim excessive deductions. They then make the assumption that all such individuals may cheat.

7. Claiming 100% use of your car for business: If you are self-employed and use your car for business be honest with how much you actually use the car. Keep very good records of the miles you drive. I know it’s a nuisance but necessary.

8. Cash businesses: If you have a cash-intensive business like an antique shop, junk shop, car wash, a bar, a hair salon, or a restaurant you are probably on the IRS’ short list! Whenever a lot of cash is involved, the assumption is someone is slipping some under the table!

9. Large cash transactions: The IRS requires reports to be filed for cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses.

10. Math errors: If you do your tax return in long hand, check you math and be sure to sign the return and put in the correct social security numbers.

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