According to CNN Money, the following are 11 tax audit red flags to avoid:
You have a sketchy tax preparer. Regardless of what your preparer may tell you, the taxpayer is legally responsible for for all the information on their return. In addition, paid tax preparers are all required to have a Preparer Tax Identification Number (PTIN) so customers can verify that they are legitimate. Make sure this number is listed on your return as well as verifying all the information being submitted.
You make stupid mistakes. Whether you accidentally omitted information or you slipped up when doing subtraction, making errors on your tax return will cause the IRS to take a second look.
- You have a big mouth. Beware of trying to cheat on your taxes. The IRS offers whistleblowers a reward of up to 30% of any additional tax or penalties it collects from tax cheaters. With information widely available and verifiable on the internet and social media, any suspect activities can now be easily uncovered.
- You’re extremely charitable. When giving small items to Goodwill or thrift stores, report the estimated resale value, not the original value. And make sure you keep track of when donations are made and hold on to receipts. It also doesn’t hurt to take photos of the donated items for your records. Be realistic on the value of the items and don’t over-inflate the worth of donations.
- You didn’t file your taxes. If you’re required to file a return and you don’t, the IRS will hunt you down.
You own a business. The IRS tends to look extra closely at taxpayers reporting businesses on Schedule C forms because there’s more room for fudging. Make sure your records are up-to-date and organized. You may also want to think about incorporation for your business instead of filing as a sole proprietorship.
- You’ve been audited before. If you have been audited once, your chances are much higher of being audited again. Better to play it extremely safe for the first three years following an audit since the IRS will be monitoring you extra during this period.
You have a home office. Deducting a home office can always be a red flag, because many taxpayers consider any part of the house where they do work to be an office — even if they do other things, like watch TV or cook, in that same area. To qualify for a home office deduction, you must use the office exclusively for work and it must be your primary place of business — not one of several offices. If this is the case, make sure you document expenses like housekeeping, alarm systems and other items you plan to claim — down to the share of utilities you use in just the office itself — in case the IRS decides to check it out.
- You’re rich. Being rich isn’t always a good thing. Your chances of being audited increase dramatically the more income you report. The more income you have, the more important it is to make sure you have a qualified tax professional handling your return.
You have foreign assets. Foreign bank accounts have been a huge focus for the IRS in recent years. In an effort to reel in taxpayers with illegal overseas accounts, the agency has launched initiatives that waive certain penalties for taxpayers who come clean. This year, the IRS introduced a program that gives taxpayers a reduction in penalties — and no jail time — if they fess up to any undisclosed overseas accounts for an indefinite window of time.
You guess on investments. The IRS is now getting data directly from brokers. If the information on your return doesn’t match, there will be an issue. Be sure to report your exact purchase dates and prices.