Now that we’ve entered the tax filing season, many taxpayers’ thoughts naturally turn to the subject of IRS audits. What are the chances you’ll be audited by the IRS? It depends.
The overall audit rate is low. In 2012 only 0.94 percent of all individual taxpayers with incomes under $200,000 were audited. Taxpayers with incomes of $200,000 to $1 million were audited at a 3.7 percent rate.
However, there are a number of ways to greatly increase your audit odds. Here are six:
1. Be a real estate professional
There are no statistics available on how often real estate professionals are audited, but anecdotal evidence indicates they are in the IRS’ crosshairs. This is particularly true for real estate pros who own rental property and claim rental losses.
Unlike everybody else, real estate professionals can be exempt from the passive loss rules that greatly limit the ability to deduct rental property losses from other nonrental income. If you claim such losses, the IRS will take more interest in your return.
This is especially likely if you have a full-time job and also claim to be a real estate pro. The IRS is highly skeptical that people who have day jobs can put in enough hours in real estate to qualify as a real estate professional for tax purposes.
2. Claim 100 percent business use of your only vehicle
Another way to greatly increase your audit chances is to claim that you use a vehicle 100 percent for business when you own only one vehicle. When you claim the business mileage deduction on Schedule C you are specifically asked how many cars you own. If you own only one, the IRS is not going to believe you use it exclusively for business.
3. Claim large travel and entertainment deductions
Large travel and entertainment deductions invite scrutiny by the IRS. Historically, these have been some of the most abused deductions by taxpayers. As a result, the record keeping requirements for them are particularly stringent. Remember, you can deduct entertainment or meals only if there is a business purpose for the expense.
4. Large charitable deductions
You’ll invite IRS scrutiny if your charitable deductions are disproportionately large compared to your income. Also, remember that you must file IRS Form 8283 if you claimed a total deduction of more than $500 for all donations of property. You’ll need to get an appraisal if you claim a deduction of $5,000 or more for a single item.
5. Claim ambiguous or general expenses
Listing expenses under vague categories such as "miscellaneous" or "general expense" invites IRS scrutiny. Be specific. IRS Schedule C lists specific categories for the most common small-business expenses. If an expense doesn’t fall within one of these classifications, create a specific name for it.
6. Fail to report all of your income
IRS computers compare 1099 forms that self-employed real estate pros receive with their tax returns to determine whether there are any discrepancies. If there are, you’ll be contacted by the IRS.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.
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