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How to Avoid the Top IRS Tax Audit Red Flags

Tax season is a stressful time for people all over the United States. Fears of owing money to the IRS run high. The only thing more frightening; getting a letter from the IRS saying that you are being audited. In reality, the likelihood of being audited is relatively low, but there are certain factors that increase your chances of triggering a red flag with the IRS.

Making a Large Amount of Money

Most average Americans are not targets for an audit by the IRS. In 2015, the audit rate was only 0.84%. However, the more money you earn, the more your chances for an audit increase. Incomes of more than $200,000 went from 0.76% to 2.61% for that same year. That's a 1 in 37 chance of being audited. If your income was more than $1 million, there was a 10% chance for an audit. The reason higher incomes tend to trigger attention is because returns are more complex due to tax shelters and more deductions. Not only that, but the IRS is looking for a decent return on investment, and the wealthy are clearly the ones with more money. While you shouldn't try to earn less money, or fudge numbers, it is just important to know that if you earn more, you have a higher chance of being audited.

Not Reporting All Taxable Income

The IRS receives copies of every W-2 and 1099 form that you get. This information is used to match numbers that are placed on your return. For this reason, it is important that the information on your return matches the information on the forms you receive from employers; otherwise, the IRS computers will send up a red flag. The more employers you have, the more difficult this can be, so you will need to be extra vigilant when filing. And if you have a 1099 with incorrect information on it, you will need to make sure that your employer submits a corrected form to avoid problems.

Large Charitable Donations

When you make a charitable donation, not only do you do something great for the community, you also get to use that donation for a deduction on your tax return. However, if you claim a large donation that is disproportionate to your income, the IRS will become suspicious. This is because the IRS has information regarding the average donations made by different income levels. Failing to get an appraisal for donated items or file a Form 8232 for donated items valued at over $500 will also send up a red flag. If you make donations, make sure that you keep all supporting documents and receipts.

Home Office Deductions

These days, there are a significant number of Americans who work from home. By doing so, you are able to claim office space and a percentage of your utilities, as well as any purchases you have made to do your job (such a new computer), as deductions. However, the term "home office" has been over-used so much that claiming these deductions often triggers a red flag. You need to have a dedicated space for conducting your work, and take accurate measurements of the room against the square footage of your house. You will also need to prove that this space is used for work only, which means that guest rooms, play rooms or family rooms are out of the question.

Failure to Report Foreign Bank Accounts

Stashing money in foreign bank accounts and failing to report it to avoid taxes is illegal, and can result in substantial penalties. The Foreign Account Tax Compliance Act has made it mandatory for all foreign banks to report any information regarding American asset holders to the IRS. It is imperative that you fill out all required paperwork and submit them in a timely manner. All foreign accounts totaling over $10,000 need to file a FinCEN Form 114 by June 30, and those with more than $50,000 must file a form 8938 with their tax return. If you have failed to report in the past, the Offshore Volunteer Disclosure Program (OVDP) allows you to come clean and reduces your penalties for doing so.

While there is nothing you can do to avoid getting audited by the IRS, avoiding red flags can decrease your chances. Just make sure that you are completely honest on your return and have all of your supporting documentation on file, which will greatly help your case in the event that the IRS does contact you.