Running a close second as to the most popular questions I get is ” Will this raise a red flag with the IRS?” What most people don’t know is that there are many more audits being conducted without you knowing your beng audited. As more regulations hit the books requiring electronic reporting more information is being gathered about you at the IRS. Brokerage firms are reporting your interest, dividends and stock sales, mortgage companies are reporting mortgage interest, real estate taxes, points and mortgage interest premiums. And the IRS is matching these items up.
Additionally, the IRS has compiled information over many years and has developed averages for many deductions based on income levels. If a return includes deductions too far outside the norms it could get a little extra attention. So here are a few items that will trigger red flags at the IRS:
1. Failure to include ALL of your 1099s like interest, dividends and the like. With the matching up of outside data this is a surefire way to get “fan mail” from the IRS.
2. Larger than normal home office deductions. The IRS thinks this is one of THE most abused deductions taken. As more and more people take contract jobs they look for all the deductions they can get. Everyone should take any legitimate deduction but on this one don’t go overboard.
3. Too many losses for your side businesses. The IRS expects any business to show a profit at least 2 in every 5 years. If you can’t do that then it is possible they will consider that activity a hobby and disallow your losses.
4. Extra large charitable contributions. Make sure you keep your receipts for any cash contributions. For those non-cash donations to your favorite charity keep a list of every item and it’s condition at the time of the donation. Better still there are programs available that assign a value to most of the items donated and will keep track of it for you.
5. Too many round numbers. The IRS is somewhat averse to estimates. The term “Ballpark” is not in the code.
6. Rental real estate losses when you do not activly participate in the management of the property.
7. Extra large unreimbursed employee business expenses.
As I have posted on Facebook before the IRS is targeting self-employed individuals these days so for you mavericks out there all the above is in play plus some. When in doubt documentation is paramount. Better to keep up with those mileage logs all along than to try to create one a couple of years later.