The IRS receives so many tax returns each year. Many people think that there is a low probability of them being audited because there are so many tax payers. However, the IRS has implemented a filter system that alerts them when information may not be correct or warrants attention. The following will probably trigger an IRS audit.
1: Out of Proportion Income Figures
The IRS is very knowledgeable as to the median salary of most jobs. If your salary is not in alignment with what is common within your industry, it may trigger an IRS Audit. The IRS will probably contact you to find out why. The best way to avoid issues such as this is to be honest and do everything by the book.
2: Self-Employment Deductions
Being self employed offers many advantages. Unfortunately, it also means that you have a higher probability of being audited, than if you were a W-2 employee. This is largely due to you being allowed to claim business expenses. If you operate a business, it is best to separate business expenses from personal expenses. In the event your are audited, this simplifies the whole entire process.
3: Tips and Cash Earners
It can be hard to keep track of all those tips and cash payments. Businesses who receive large cash payments are more likely to be triggered for an audit than a business that does not. Keep detailed accounting records and do not under report your income because it may come back to haunt you.
4: Home Office Deduction
This is really a big red flag. The IRS have strict guidelines that must be followed in claiming this deduction. Some people include their entire home as a deduction. The best way to avoid sending any type of triggers is to just follow the IRS guidelines about the proper way to claim this deduction.
5: Business Losses
Business losses are expected for the first three years of business. However, if you are still claiming business losses after 5 years of being in business, it may trigger and IRS Audit. The IRS will start to wonder if this is really a business or a hobby and if you are writing off the hobby to receive tax deductions.