May 31, 2015

39267587_sIf there’s one thing that taxpayers fear more than paying taxes, it’s being audited by the IRS. Have you ever wondered about what triggers an IRS audit? While there is no clear-cut answer to that question, there have been plenty of theories on which tax deductions attract the attention of the IRS and result in an audit.

Some write-offs known to trigger IRS audits include:

Travel and entertainment deductions

Business owners are entitled to write off a percentage of travel, food, and entertainment expenses as deductions. These deductions, of course, must be reasonable and justifiable business expenses. If you wish to avoid the IRS, a deduction must meet the business purpose test clearly—regardless of how much money you make.

Charitable donations

Unusually large charitable contributions could potentially lead to an audit. The IRS has historical data on how much people typically give. If they find that you donated far more than what people in your age and income bracket usually give, then you may be a candidate for a tax audit.

Non-cash charitable donations can also be a problem area for many, particularly since a monetary value need to be assigned to non-cash donations such as used clothes. You need to be realistic about the value of these donations unless you can justify their valuation.

Home office deductions

There may be tax advantages to working from a home office, but it is important to be careful and be aware of the necessary requirements to qualify for this deduction. A certain area of your home must be used solely for your business. Using a section of your bedroom, for instance, will not qualify for a home office deduction. After all, the bedroom is also being used for personal use.

Unreimbursed business expenses

Employees are entitled to deduct business expenses when their employer does not reimburse these expenses, and when the total is more than two percent of their adjusted gross income. Apart from properly documenting that you are indeed an employee, you will also need to get a second opinion that the expense is indeed deductible for your business. This deduction should not be abused. While protective clothing and uniforms may be considered as a necessary business expense, work clothes such as a suit and tie are not.

Vacation home rentals

Since taxpayers may be able to combine the personal use of these vacation residences with renting them out for additional income, many people abuse the vacation home rental business for their tax write-offs. In order to avoid a tax audit, you must be aware that you do not have to report any income if the property is rented for less than 15 days. Also, you must document expenses for both personal and business use; expenses apportioned for personal use cannot be considered deductible.

Remember that audit flags do not always lead to actual tax audits with the IRS. They do not even mean that something is wrong with the return. Instead, it indicates that the possibility is higher for a particular tax return to be checked by someone at the IRS.

It is always best to take the time to ensure that everything is correctly done. If your tax return and deductions are legitimate and properly reported, then you have nothing to worry about.


Categories: Business Tax Issues, IRS