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5 Ways To Get Audited By The IRS

There are some instances where you might not mind taking a calculated gamble. For example, on a hand in blackjack or a risky stock pick, you may decide to spin the proverbial dice and take a chance with the perceived odds of some benefit.  When it comes to IRS audit, there is no realizable benefit to trying to gamble with the IRS audit system.  Even though you may have read all of the articles that explain the very low probability that you will actually be audited, it is still not worth taking the risk that you could become a victim of the IRS audit machine.  That being said, there are a few “risk factors” that could help you land a one-way ticket to a sticky IRS audit and in some real hot water.  Listed below are the 5 easiest ways that you can trigger an audit, and why you should be cognizant of the potential for audits in these unique situations.

  1. S-Corp Election – If your business is organized as an S-Corp and you have “pass through income” you should be very aware of the potential for audits. It is necessary that a “reasonable wage” is taken (not concretely defined by the IRS) and can absorb the rest of the pass-through income as distributions.  If you are claiming a paltry $15,000 yearly wage and are getting $400,000 in yearly distributions, there is a good chance that this could raise some eyebrows with the IRS.  Try to be aware of this and be happy you’re getting payroll tax relief on the income you acquire through distributions, and pay yourself a wage similar to what other workers in your industry might make.
  1. Claiming the Home-Office deduction – You spend a lot of time composing work emails while sitting on the couch and watching Sunday football – this means you can deduct your living room as a home office, right? If only it was this easy.  The home office deduction is an oft abused deduction that can help expedite a one-way ticket to Auditville.  If you have a legitimate home office expense, then claim it up to the amount that is allowable, but keep in mind that it could draw some extra scrutiny with the IRS Audit Examiner’s Office. Check out these 6 tips when claiming the home office deduction.
  1. Excessive Charitable Donations – Shelling out money to a cash-strapped cousin or tossing a few bucks in a panhandler’s hat may seem like a charitable donation that the IRS would allow. However, the IRS is relatively strict for the amounts that can be claimed as a charitable donation and a large donation can often raise red flags with the IRS.  If you are donating furniture or other expensive merchandise, get a receipt with the approximate value and date, if you plan on deducting the donations.  All in all, keep these donation deductions reasonable and relatively low as it may help to draw some unwanted attention. Click here for 8 tips for deducting charitable donations.
  1. Not Reporting All income – Just an FYI, the IRS receives a copy of any W-2 or 1099 you may receive during a year. If you “neglect” to mention the $1,200 you won at Baccarat, then you might want to think twice.  The IRS most likely received written proof of this payment and you’ll have to claim this on your return.  This is a leading cause of unwanted audits and is the one of the easiest to prove by the IRS.
  1. Making too much money – This could be one of those problems, in that the more money you make the more likely you are to be audited. If you are bringing home over $5 million dollars a year then you are incrementally more likely to get audited.  This is just the facts and while it doesn’t necessarily seem fair, it is understandable why the government might have an increased interest in your returns.  If this is your only red-flag then just spend the extra money and make sure your returns are squeaky clean.

If you keep these 5 factors in mind when filing your Form 1040 every year, you might have a better gauge for your true likelihood of getting audited.  Even so, if you don’t fall into one of these categories, this doesn’t mean you’re off the hook.  The risk is never worth the reward and taxes are one instance where it’s a good idea to just keep it honest.

Call Timberline Tax Group at 844-345-3250 for a free consultation.

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