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There are certain items that if reported (or not reported) on your return will trigger the IRS to want to dig a little deeper into your finances. Take a look at these 10 tax audit red flags to be sure you aren’t drawing the attention of the IRS.

  1. Foreign Assets – If you check off the box on your tax return (Schedule B) that declares you have an ownership interest in foreign accounts. You should always provide the information about that asset. If you do not, the IRS will definitely want to know how much money you have stored out of the United States.
  2. A vengeful enemy – Did you recently go through a messy divorce? Fire a disgruntled employee? Some people will go to great lengths to seek revenge by ruining another person’s reputation. This can be done by contacting the IRS, phone call or letter, and reporting possible underreporting of income, or even committing a serious financial crime. These allegations do not have to be based on facts to get the IRS to check into it.
  3. Rounding – When reporting expenses on your tax return, the IRS recommends rounding to the nearest dollar, not to the nearest hundred or thousand. Items such as business expenses or unreimbursed employee expenses that all happen to be, for example, $1,000 or $3,500 can cause the IRS to question the validity of the expenses. It may seem like these are made up figures or overstated figures to the IRS.
  4. Questionable Deductions – Trying to take a tax deduction for an expense that is not clearly allowable on your return always runs a risk of being scrutinized. Writing off a pool as a medical deduction is one of the most common risky deductions. To qualify, you must be able to prove that you purchased the pool solely to help with the treatment of a medical condition. If you don’t have a doctor’s prescription requiring the use of a pool the deduction likely won’t be allowed.
  5. High Net Worth – It is more common for taxpayers with income over $5 million to be audited than people with less income. This is simply because the tax returns tend to be more complicated and any mistake will usually lead to higher revenue for the IRS.
  6. Reporting versus Saying – If you report large net losses on your business returns regularly and then in an interview state that you see huge profits, this might make the IRS want to check in on your company. Even if what is said is not factual, it does not mean the IRS won’t want to confirm the information anyways.
  7. Lots of Work Related Driving – Although it may seem like a nice idea to be able to get a big deduction for all of the gas costs you had for the year, make sure you are tracking what was business versus personal use. A large vehicle expense can easily make the IRS second guess your figures, resulting in an audit.
  8. Overestimated Donations – The IRS bases the reasonableness of your charitable donations on your income level and other measures. If you are reporting large donations, make sure you keep your receipts to be able to back up your calculations.
  9. Unprofitable Business – If year after year your business has not seen profits, beware the IRS might reclassify it as a hobby instead. If you can authenticate the losses and explain how the business is staying open while making no money, they will accept the losses as is. If you can’t verify the reasoning behind the losses and don’t have items that prove you are a real business (such as business cards), the IRS might revise your tax return.
  10. A Shady Tax Preparer – If the IRS has found by auditing taxpayers that the same tax preparer keeps coming up on the returns, they may target your return simply because of the person you have file it. Be sure you are always having your returns prepared by a qualified professional.