Because of budget cuts, the IRS is likely to be doing fewer tax audits this year. The overall number of audits is expected to fall to about 1 million, compared to 1.4 million as recently as two years ago. We discussed this trend in our February 7 post.
But even with the trend toward fewer audits, there are still activities that tend to serve as “red flags,” in the sense that they can increase your chances of being audited. In this post, we will take note of some of these warning flags.
One of the most basic flags that can increase the likelihood that your return will be audited is not reporting all of your income. As we noted nearly two years ago, in our March 27 post, it can be easy to forget to report all of your miscellaneous income.
But remember, when you file your tax return, that the IRS uses an automated system to detect discrepancies between the income you report and information about your income that is available to the IRS from other sources.
It is also important to be careful about the tax deductions you take.
For example, let’s say you are deducting expenses from a home-based business you are trying to get started. If you do this for several years in a row, and keep losing money every year, it may seem to the IRS that the expenses are not legitimate business expenses. Instead, your activities may be what the IRS view as a ‘hobby loss.”
Source: CNN Money, “8 tax audit red flags,” Feb. 25, 2015