Continue Reading Below
Fewer than 1% of U.S. taxpayers are audited by the IRS each year. However, some things can dramatically increase your chances of being audited. Here are three things our experts say can make your tax return catch the IRS' attention.
You generally needn't worry about an IRS tax audit unless you're trying to pull a fast one on Uncle Sam. That said, a return that is unusual in any way could draw attention from the agency. The IRS processes so many tax returns that it knows what to expect from all kinds of people and situations. It knows, for example, the typical range of charitable contributions for people at every income level. If your reported generosity in a given year is far above the norm, that can be a red flag that prompts the IRS to take a closer look. If you're being honest on your return and you really did donate what you said, then an audit will be a simple matter of your providing records and the IRS' closing the case.
Other unusual deductions can also raise eyebrows, such as mortgage interest deductions that seem too large. Another example: If you're self-employed and claim outsized deductions for business meals and entertainment, the IRS might want to see your receipts.
Even having a high income can trigger an audit. The IRS audits those earning more than $200,000 per year more than three times as often as those earning less than $200,000. It also knows what people in various occupations tend to earn, so if your income as a high school teacher or nurse is much higher than the norm, the IRS might want a closer look.
You might not be able to avoid being audited one day, but you can make the process easier by keeping good records of your inflows and outflows, as well as any financial events that appear on your return in some way.
Continue Reading Below
One area where the IRS has ramped up enforcement activity involves alimony payments between divorced spouses. Under current law, alimony payments are deductible by the person making the payment, while the other person must declare that money received as taxable income. Yet because there are no specific 1099 reporting requirements, the only information the IRS has to go on is the two regular tax forms from the divorced spouses. If they're inconsistent, then the IRS has grounds for an audit.
It's important for divorced spouses to realize that not all payments they make or receive are alimony. Money for child support, property settlements, and voluntary payments between former spouses don't qualify as alimony, so they're not deductible by the payer or included in the income of the person who receives them. In general, if nothing says a payment isn't alimony, then it will be treated as such, and the deduction and income rules will apply. Ideally, your divorce decree will include a breakdown of any payments between spouses and whether they're considered alimony, but it's still a confusing area that can draw IRS scrutiny if you don't stick to the rules.
One big red flag is reporting excessive business deductions or reporting an operating loss for a business, which leads to no income tax liability. These claims can indeed be legitimate -- after all, many businesses lose money -- but they dramatically increase the risk of an audit.
One particular deduction that's abused by self-employed individuals (and therefore catches the attention of the IRS) is the home-office deduction. In order to claim this, a portion of your house must be usedexclusively for the purpose of conducting your business. A computer workstation in the corner of your family room doesn't count, so don't even try it.
Many other business deductions are also abused frequently. For example, some people try to deduct family vacations as "business travel," business clothing as "uniforms," or their personal vehicle as a company car. Before you get creative with your business deductions, consider that the odds that your return will be audited triple if you submit a "Schedule C" to claim business income and expenses, and they increase almost tenfold if your business income is over $100,000.
By all means, claim every single legitimate tax deduction and credit to which you are entitled. Then you should have nothing to worry about, even if you are audited. Just make sure you can back up everything you claim.
The article The IRS Could Audit You for Doing This originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.