Biggest Tax Audit Triggers
NEW YORK ( MainStreet) You walk out to the mailbox to find a letter from the IRS. Hair raises on the back of your neck in dread:is this an audit?
Probably not. In fact, less than 1% of tax returns are audited by the IRS every year. Most of those are handled with what is called a "desk audit." This is when the IRS contacts you requesting more information, or to square away a discrepancy between their records and yours.
All returns aren't created equally, however: some are more likely to trigger an audit than others. If you want to avoid the full-cavity search of an all-out IRS audit, here's what to avoid.
It might sound obvious, but it's one of the most common ways that a desk audit gets triggered: not having accurate information on your return. "If your W2 or 1099 or 1098 doesn't match your return, that's going to trigger a desk audit," says Leif Novie, a principal in the tax and accounting department at MBAF.
Mike Campbell, a tax partner in the private client services group at BDO, urges people to take every deduction that they're legally entitled to. "People shouldn't skip deductions, because they're afraid it will trigger an audit," he said. At the same time, he acknowledges that inaccurate deductions are one of the biggest reasons for an audit. "Incorrect information is the hardest to defend at an audit," he explains.
"Sometimes people just put deductions in the wrong place," he says, which can trigger a desk audit. Problems arise when people are inappropriately claiming deductions. "Don't claim a loss on a Schedule C business that's actually a hobby," he says.
He also points out that the IRS has a number of tables that determine how much of a deduction is too much for different income brackets. A closely guarded secret, no one really knows what qualifies as "too much." "Homeowner interest deduction is a common audit trigger," he says. "If it's too high relative to your income, that can trigger an audit."
More on the Schedule C
Don't ever claim that a hobby is a business and claim a loss. To do so is to invite an audit, says Novie. "Declaring a loss year after year is another way to get audited," he says. "If there's no profit in five out of five years, the presumption that you're actually running a business is going to start moving against you."
This is such an audit trigger that Novie has advised clients to pass on expense items for the sake of showing a profit. "We pass on deductions that are smaller if we need to show a profit," Novie says.