An H&R Block tax specialist giving instructions about the updated tax law in December 2017.Joe Raedle/Getty Images
- Your chances of a tax audit increase with the more audit triggers the IRS finds on your tax return.
- If you work in the gig economy, even part time, the chances you’ll make a tax mistake increase.
- Here, CPA Cari Weston details eight potential triggers that will increase your chances of being audited.
You might not be able to avoid an audit this tax season, but according to CPA Cari Weston, good record-keeping means you won’t have to sweat it.
Weston is currently the director of tax practice and ethics for the Association of International CPAs (AICPA), but before that, she represented many clients in IRS audits during her 20 years in practice as a public accountant.
We spoke with her about audit triggers, how the audit process works, and steps you can take so you don’t have to fear the IRS.
What you need to know about IRS audits
Your chance of facing a full-blown IRS audit is very slim. In fiscal year 2017, the IRS audited 1.1 million returns, out of the 196 million that were filed. That’s 0.5%. Though Weston said the IRS actually performs more audits than this statistic suggests, by sending assessment notices and doing paper audits (audits by mail).
It might be multiple factors rather than any one thing that earns you an audit, according to Weston. “The IRS has this system that’s basically like a point system,” she said. The more risk factors on your return, the greater your chances of being selected for audit.
Here are the top IRS audit triggers to avoid, according to Weston.
1. Home office deduction
If you set aside and regularly use a portion of your home for your business, you may qualify for a home office deduction. But you must follow the IRS guidelines (and no, the side of the couch where you sit with your laptop does not qualify).
“I’ve always been a big fan,” Weston said of the home office deduction. As long as you qualify and have good records, including photos, she believes you should take this deduction.
One caveat: Weston noted that employees who work from home can no longer deduct their home office expenses under the tax overhaul passed by Congress last year. And it can be an audit trigger.
2. 1099 income
If you are an independent contractor, you will get a form 1099-MISC from clients who paid you $600 or more. If you worked for one or two large clients, your 1099s won’t be an audit trigger, Weston said; it’s when you have lots of small clients that the IRS suspects you might not have reported everything.
Report all your income, whether you got a 1099 or not, and keep good records, Weston advised. “The very first thing they will ask for when they audit you is your bank statements,” she said. Keeping a separate account for your business income and expenses will help you in an audit.
There are two opposite issues with self-employment income, according to Weston. First are those who work in the gig economy and have never filed a Schedule C, or “profit or loss from business” form, before.
“I think there’s a lot of people that don’t know they’re in business,” Weston said. Many gig workers don’t keep the business records they need to defend an audit.
On the flip side are those who deduct expenses from a business the IRS would consider a hobby. “Usually, on a Schedule C, they’re looking for deductions that you’re not entitled to because you’re not a business,” Weston said. One example: a retiree who occasionally drives for Uber for fun, not for the money. If your business isn’t making a profit, and you’re claiming a deduction on it, that’s a red flag.
4. Charitable contributions
The IRS has strict rules on charitable contribution deductions, especially when you donate property rather than cash. “You have to have [a receipt] now for anything over $250,” Weston said, as well as “something to substantiate the value and the condition.”
If you don’t have photos or other documentation to prove the desk you gave to charity was a mint condition zinc Eames, the IRS might let you deduct only the much lower yard-sale price.
5. Mileage deduction
If you drive your own vehicle for work or business, you might be entitled to deduct a per-mile amount ($0.545 in 2018) to cover driving expenses. If you drive a lot for charity, moving, or medical reasons, you can also take a small deduction for every mile you drive.
The mileage deduction is “a high area of abuse and it is a highly audited area,” according to Weston. But don’t worry. “The beauty of technology is that you can use your GPS history as an audit support,” she said. You can recreate your mileage from your business records. “That’s not fraud,” Weston said. “Making things up is fraud but creating a log after the fact is not.”
6. Rental income
Rental income, especially if you also have a 9-to-5 job, will increase your score on the IRS’s audit scale. “That is a very highly audited area because of the limits on how much you can take as a loss,” Weston said.
If you have a rental property, make sure you understand all the rules.
7. High earnings
“The higher your income is, the more likely you are to be audited,” Weston said. The IRS stands to gain more if they catch a wealthy person in a mistake.
Low-income earners aren’t exempt from audits though, especially if they claim a refundable credit, such as the earned income tax credit.
8. Estimated numbers
“Any time on your return that there are even numbers, that’s a red flag,” Weston said. If your office supplies came to exactly $500 or your mileage is a round number, the IRS will be suspicious.
“There are certain cases when, if you can’t create the numbers, the IRS allows you to estimate,” Weston said. If you estimate, you should disclose this to the IRS. She added: “If you are estimating, then you should use a round number. But if you have a real number, use the real number.”
To protect yourself against a possible audit: “Don’t run the risk of losing your receipts. Have your receipts digitized,” Weston said. Save six years of receipts because, under some circumstances, the IRS can look back that far. “If they believe there’s fraud,” she added, “they can go back to the day you filed your first tax return.”