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Planning Intermediate: Surviving IRS Tax and Audit Challenges

Introduction to Surviving IRS Tax and Audit Challenges What if I Can't Pay My Tax Bill? Audit Flags: Tax Preparation Audit Flags: Deductions and Credits What Happens during an IRS Audit? How to Survive an IRS Audit What Can the IRS Take from Me if I Can't Pay My Taxes? Summary of Surviving IRS Tax and Audit Challenges
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Audit Flags: Deductions and Credits

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Audit Flags: Deductions and Credits

As a taxpayer, you are entitled to take all deductions and credits that you qualify for. But some taxpayers abuse their privileges. Here are the most common abuses, which IRS agents are trained to spot.

Things To Know

  • Self-employed people take a lot of business-related tax deductions.
  • The home office deduction is commonly audited because office space often gets used for both business and personal purposes.
  • Charitable deductions are among the more commonly abused deductions.

Your deductions are bigger than average

You might just happen to have very large deductions from time to time. That’s fine. But the IRS compares your deductions to those in your income bracket and uses the results to select returns to audit. However, as long as your deductions are legal and properly documented, you should be fine.

Business deductions

Self-employed people tend to be generous with their business-related tax deductions. The IRS knows all about this. As with other deductions, if these are large compared to your income, the IRS might want to contact you with some questions about them. That does not mean they are invalid, though. The onus will be on you to prove them. Each expense should be documented with its purpose; this is to weed out personal expenses being unjustly claimed for business. Commonly inflated business deductions include entertainment, travel costs, meals, and office expenses.

The home office deduction

Ask people to name an example of an audit flag, and a large percentage will name the home office deduction. And they’ll likely be businesspeople. This business deduction is commonly selected for audit because office space often gets used for both business and personal purposes. There are specific rules you must follow to qualify for the deduction, including that the space you use for a home office must be used regularly and exclusively for that purpose. Make sure that your space is indeed used regularly and exclusively for your office, and make sure that it is separately identifiable. Don’t be afraid to take the deduction if you really do qualify for it.

Business use of your vehicle

If you have one vehicle and you claim 100% of it for business use, the IRS will get on your case. The odds of your using this one vehicle solely for business are far too low to be believed, in most cases. You can reduce your chance of seeing your deduction disallowed by keeping very meticulous records for each use of the vehicle: its purpose, destination, mileage, and dates.

Big charitable deductions

Charitable deductions are among the more commonly abused deductions. But if they are large, particularly compared to your income, they’re also an audit flag. If you don’t file Form 8283 for donations exceeding $500, or if you don’t get appraisals for valuables, the IRS will contact you for clarification.