Top Five IRS Audit Red Flags
We all hate the idea of an IRS audit. In general the #1 way to survive an audit is to approach your tax strategy with proper planning and legality.
Below are some of the top ways to draw some extra attention to your return.
1. Telling a story that doesn’t make sense
Your tax return is the story of your income for the year. Sometimes we are tempted to take advantages of many deductions available to us but we should also be aware of what our story looks like. For example, if you make $100,000 but donate $45,000, that seems odd. Similarly, if you have a fitness business that made $50,000 this year, and you think you can deduct thousands in clothing, that doesn’t tell a great story either.
2. You report way too much or way too little.
Make sure you properly claim all of your income from all sources. If it looks like you may be under-reporting income, the IRS will be more likely to question whether you are hiding something.
3. Recurring losses on a business that should be a hobby.
If you are claiming business income and deducting business expenses, you will want to show that this is legitimate income producing activity. If you show a loss year over year, eventually the IRS will consider your business a hobby and no longer allow you to take those deductions.
4. Making large cash deposits
Several deposits of $10,000 or more can be a red flag. The government is cracking down on income that could be illegal and this is just one sign that something could be off. If you operate a primarily cash business, make sure you deposit cash in routine and relatively consistent amounts.
5. Claiming 100% business on car, phone or office
Sometimes it is really difficult to determine how much of these items are used for business since we multitask like crazy and use these for everything. If you are going to claim 100% of your phone, make sure you have a second personal phone because it is highly questionable that you only use the phone for business reasons.