Taxes: Audit Red Flags

BOSTON (CBS) – Less than one percent of last year’s returns got audited.  Most audits are simple paper audits where the IRS sends you a letter asking for supporting documentation. The IRS will not call you or e-mail you and demand money. This is a scam. So what may trigger an audit?

  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.
  1. Claiming large charitable deductions: The IRS calculates what the average donation is for a person in your income bracket. If you are over that amount it may trigger an audit. If you make a contribution over $250 you will need a letter from the charity.
  1. 3. Earning a bunch of money: Over $200,000. You are more likely to be audited if you make the big bucks. Earn $1 million and you have a one in 9 chance of being audited.
  1. 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.
  1. Home Office deduction: There is a new, simplified calculation for claiming a home-office deduction. Be realistic though with how much space you do use in your home. The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500.
  1. Business meals, travel and entertainment: Schedule C is filled with deductions for the self-employed individual. And the IRS has figured out that often some self-employed individuals tend to claim excessive deductions.
  1. 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 for business. Keep very good records of the miles you drive.
  1. 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!
  1. Math errors: If you do your tax return in long hand, check your math and be sure to sign the return and use the correct social security numbers. A sloppy return can trigger an audit.
  1. Claiming an Alimony Deduction: The rules are complicated and many taxpayers try to lump in child support payments under this deduction. No can do!
  1. Taking an early withdrawal from your IRA or 401(k): Magic age here is 59½ . Many folks try to dodge the 10% early withdrawal penalty.

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You can hear Dee Lee’s expert financial advice on WBZ NewsRadio 1030 each weekday at 1:55 p.m., 3:55 p.m., and 7:55 p.m.

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