10 big client tax mistakes that can lead to an audit

Published
  • April 09 2018, 5:35pm EDT
The number of tax returns examined by the IRS drops every year, to the point where the agency now audits just 0.5% of all returns – but that still amounts to over a million squirming taxpayers.

With that in mind, here are some red flags that will draw the IRS’s attention to a return.

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The number of tax returns examined by the IRS drops every year, to the point where the agency now audits just 0.5% of all returns — but that still amounts to over a million squirming taxpayers.

With that in mind, here are a round dozen red flags that will draw the IRS’s attention to a return.

Misreporting or not reporting income

Making sure that the income from W-2s and 1099s matches the income reported on the return is critical. Among other things, it’s easier than ever for the IRS to access and compare the amounts reported — making it harder and harder to get away with discrepancies, which then stand out like sore thumbs.

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Earning more than $200,000

In fiscal year 2017 (the most recent year for which data is available), the IRS audited just 0.2% of most returns of taxpayers with under $200,000 in income — but it was four times as likely to audit those with between $200,000 and $1 million in income, looking at 0.8% of those returns.

But the real red flag is earning of $1 million — the IRS audited 4.4% of those returns in 2017.

Big changes in income

Whether it’s a scary drop or a significant increase, major changes in income can catch the eye of the IRS.

Unusually high charitable deductions

The IRS has been implementing stricter rules for documenting charitable giving for some time, as well as paying attention to claims for deductions than are higher than average for the taxpayer’s income.

For next year, the raising of the standard deduction in the Tax Cuts and Jobs Act is expected to significantly decrease the number of people who itemize their charitable deductions — which could have the unexpected side effect of making unusual claims stand out even more.

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The wrong Social Security number

Between concerns about ID theft and underreporting of income, returns with inaccurate Social Security numbers or discrepancies between the numbers on source documents and the return itself, will often draw added scrutiny and possible rejection.

Hobby losses

The IRS has some very specific rules and guidelines for what qualifies as a business and what’s just a hobby that happens to cost a lot of money, and some of those hobbies, like horse racing and horse breeding, will often generate increased attention.

Inconsistent alimony reporting

Since those who aim to deduct alimony need to report the Social Security number of the ex-spouse to whom they’re paying it, it’s easy for the IRS to detect if the claim matches what was actually paid.

Note that, thanks to the Tax Cuts and Jobs Act, alimony for divorce settlements made after Dec. 31, 2018, will no longer be deductible.

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Home offices

It’s perfectly legitimate to claim a home office — but it has to meet the strictures of the tax code and the IRS’s guidance. With too many taxpayers attempting to claim their living room because they sometimes answer work-related emails in it, this is a red flag for auditors.

Big meal and entertainment expenses

From all the millions of returns they receive, the IRS has a pretty good sense of what most types of businesses spend on meals and entertainment, so claiming outsized expense deductions will draw their eye.

This will be even more of an issue during next tax season, when the TCJA’s stricter limits on the deductibility of business meals and entertainment expenses go into effect — which means businesses should be paying attention to those limits right now.

Owning a cash business

It’s much easier for a business that deals in cash — think restaurants, bars, convenience stores and the like — to hide or misreport income, so the IRS is more likely to examine the return of an individual who owns one.