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Avoid IRS Audit Red Flags by Richard Cabrera, JD, LLM, CPA

Posted on May 10, 2018 by Richard Cabrera

According to the IRS, the number of tax returns that the agency examines under audit has decreased each year since 2010. However, the IRS’s shrinking budget and limited resources are not enough to give taxpayers a reprieve from an audit. Following are 10 of the top red flags that could trigger IRS scrutiny.

 

  1. Not reporting or misreporting income that is a matching item. Income that is reported on W-2s and 1099s should match the numbers that you report on your federal income tax return.
  2. Earning more than $1 million. In 2017, the IRS audited 4.4 percent of tax returns with income exceeding $1 million, 0.8 percent of returns reporting income of more than $200,000, and just 0.2 percent of returns with less than $200,000 in income;
  3. Big changes in income from year-to-year, including a significant increase or significant decrease in amount you report;
  4. Abnormally high charitable deductions will be easier to spot for the 2018 tax year thanks to the tax reform law that increases the standard deductions and will reduce the number of taxpayers who itemize;
  5. Unusually low compensation paid to an S Corporation owner;
  6. Incorrect Social Security Numbers;
  7. Claiming hobby losses could draw the attention of the IRS, which follows very specific rules regarding the treatment of income earned from a business or from an expensive hobby;
  8. Showing consecutive years of losses on Schedule C, Profit or Loss from a Business;
  9. Excessive use of a home office deduction, or unreimbursed employee expenses;
  10. Excessive claims for meals and entertainment deductions, which the Tax Cuts and Jobs Act limits in 2018.

About the Author: Richard Cabrera, JD, LLM, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning, consulting, and mergers and acquisition services to businesses located in the U.S. and abroad. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

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