How to avoid an IRS tax audit

Chicago TribuneMarch 15, 2014 

The odds of being singled out by the Internal Revenue Service are very low, but certain types of deductions, even very common ones, can raise red flags with tax collectors and possibly trigger an audit.

To minimize the chance of getting an audit request from the IRS, tax experts say take care with certain deductions and keep good paperwork to back up claims.

Joy Taylor, assistant editor for The Kiplinger Tax Letter, said 0.96 percent of individual tax returns last year were audited, the first time in seven years that the overall individual audit rate slipped under 1 percent. The IRS has fewer resources, lower budgets and less personnel than before, she said, which accounts for the drop in audits.

However, that doesn’t mean the IRS has gotten any less zealous about audits. Instead, Taylor said, “They’re more hyperfocused, doing what will get them the most bang for the buck.”

One of the biggest red flags the IRS looks for is outsized charitable donations relative to income. Taylor and Leif Novie, principal at Morrison Brown Argiz & Farra, both said the IRS charts average deductions based on a person’s income, so if charitable donations appear excessive, it may raise eyebrows.

The IRS may ask for proof of such donations. Noncash donations of more than $5,000 without an appraisal of the items’ value will invite closer examination.

Novie said one of the most common deductions for self-employed individuals that can trigger an audit is for a home office.

“The rule is you can only deduct a home office if you don’t have another office available to you,” he said.

It has to be an area that’s devoted exclusively and regularly to business, Taylor said.

An offshoot of the home-based business deduction is one for a work vehicle, she said. Trying to claim that an auto’s use is all business is risky.

“Many people might own two vehicles and write one off 100 percent for business use. But you may be also dropping the kids off at school in the same car, taking them to practice, running personal errands in that car. There’s a lot of fudging (by people) with business vehicles,” she said.

Business owners that show losses year after year may pique the agency’s interest, said Brittney Saks, U.S. personal financial services leader at PwC.

“If you have a business, you have more ability to offset your income with expenses, so there’s more subjectiveness in there,” Saks said. “In particular (the IRS wants) to make sure it’s a real business and not a hobby.”

Saks said that people worry simple mistakes like computational errors or transposing numbers will trigger an audit, but that’s unlikely. The IRS will notify the taxpayer, since the agency has data matched up on a computer, but she said those typos are easily fixed.

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