While full-blown audits from the IRS are something that tax preparers are used to, a taxpayer likely views an audit right up there with a root canal, something to be avoided at all costs.
It is impossible to predict with 100% accuracy which returns will be pulled for an audit, but there are some red flags that will increase the likelihood of such an event happening. Here is a look at a few:
- Wrong tax preparer. If the IRS believes your tax preparer is claiming false deductions, they could order an audit for all returns being prepared by that individual or firm. The lesson here is to make sure you know and trust your preparer.
- Business or Hobby. When you call something a business that is really a hobby, the IRS will likely take notice. If it’s a hobby, it isn’t eligible for deductions. If it’s a business, sooner or later you will need to turn a profit or the IRS will eventually catch on.
- Large deductions. Taking deductions for things such as charitable contributions is okay, as long as it is an amount relative to your income. If you are claiming large deductions that aren’t typical for your income range, it will cause a red flag and increase your audit risk.
Bottom line: take all the deductions for which you are eligible. However, if you are claiming something that puts you in a gray area, make sure you document everything so that you can justify your deductions in the event of an audit.