Because an audit can be traumatic and expensive, many taxpayers are looking for ways to make their returns audit-proof. There are many rumors about what the IRS considers a red flag, but very few verified facts. Here is a short guide to factors that can make your return IRS proof or bait for further investigation.
Suspected Red Flags
While the IRS does not publish their algorithms for determining who to audit and who not, accountants and tax professionals have noticed a few behaviors that seem to consistently catch their attention. These include:
- Excessive home office deductions
- Passive losses
- Sole proprietor/schedule C activities
- Disclosures requiring a Form 8275 or 8275-R
- Businesses that appear more like hobbies
If any of these line items apply to you, it is important to talk to an accountant because you are at a higher risk of being investigated. A certified professional cannot stop an audit, but they can ensure that you have a defensible position in the event of one.
Too Much Information
Another common error in filling out tax returns is giving too much information. People attach documents that are not required or even relevant to their return. This gives the IRS more paperwork to check for any small inconsistency. As in all things in life, keep it simple. If the IRS decides they want to see your bank statements, they will ask for them. If you have questions about whether to include something in your return, talk to a professional.
One Basic Rule to Prevent an Audit
There is one basic rule to avoid an audit and increase your chances of getting through one with little or no damage: only claim something that you are able to defend. Never assume that you can slip one past the IRS or fool them, even in the tiniest ways.
IRS proof or bait? While there are never guarantees with the IRS, following these tips, and hiring a tax professional, will keep most people from going through that dreaded audit.
