{"id":1533,"date":"2015-12-28T12:44:52","date_gmt":"2015-12-28T16:44:52","guid":{"rendered":"https:\/\/fluentricciardi.com\/?p=1533"},"modified":"2022-01-31T12:47:05","modified_gmt":"2022-01-31T16:47:05","slug":"5-red-flags-that-could-lead-to-an-irs-audit","status":"publish","type":"post","link":"https:\/\/fluentricciardi.com\/5-red-flags-that-could-lead-to-an-irs-audit\/","title":{"rendered":"5 Red Flags That Could Lead to an IRS Audit"},"content":{"rendered":"

In our March 2014 newsletter, we provided a discussion entitled \u201cWhat Are The Chances of Being Audited.\u201d The article focused on the relative possibility of an audit given different levels of income. To more completely address the question of \u201cWhat Are The Chances of Being Audited,\u201d this article goes beyond income level and addresses the impact of different types of transactions and deductions on the relative chance for a tax audit.<\/p>\n

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Self Employed (Schedule C) Losses<\/h3>\n

Schedule C is the official IRS form for reporting items of income and expense as it pertains to taxpayers who are self-employed. Schedule C sources of income (\u201cself-employment income\u201d) are usually reported to the taxpayer filing self-employed status on Form 1099. W-2 income, on the other hand, is reported to the taxpayer on Form W-2 and not on Schedule C. Schedule C filers tend more to co-mingle business and personal expenses or to incorrectly treat personal expenses as business expenses in an attempt to hide taxable income.\u00a0Tax Payer Resolution<\/a>\u00a0also notes that self-employed taxpayers generally fail to keep detailed, accurate, and complete accounting records that are required by law.<\/p>\n

As explained in the Tax Payer Resolution article linked above: \u201cThe audits or examinations of self-employed taxpayers have a far greater degree of success by the IRS. The IRS\u2019s National Research Program estimated that unreported business income by sole proprietors accounted for $68 billion (or 20 percent) of the $345 billion tax gap.\u00a0The IRS estimates that as many of 70% of taxpayers who report net losses on a Schedule C have artificially inflated expenses to create losses.\u201d\u00a0Thus, taxpayers who file Schedule C tax returns reporting net losses have the attention of the Internal Revenue Service and are highly susceptible to being audited.<\/p>\n

Home Office Deduction<\/h3>\n

The home office deduction is available to certain taxpayers who meet strict guidelines, including a business purpose for the amount claimed, as promulgated by the IRS. So strict are the guidelines that merely filing a return based in part on the home office deduction appears to be enough of a flag to increase the risk of an audit.<\/p>\n

According to\u00a0TaxBrain.com<\/a>, some taxpayers have included their entire home for the deduction. However, your home office must be exclusively used for business purposes and not for other activities. The guidelines contained within IRS Publication 587 should be adhered to in order to ensure you qualify for the home office deduction.<\/p>\n

Meals, Travel and Entertainment<\/h3>\n

In order to qualify as deductible expenditures for meals, travel, and entertainment, the expenditures must satisfy strict substantiation guidelines. The IRS recognizes that the substantiation process is a tedious process prone to \u201cshort-cutting\u201d and therefore more susceptible to error or fraud.<\/p>\n

IRS Publication 463 governs the deductibility of meals, travel, and entertainment. The evidentiary framework that is illustrated at Table 1-1, Table 2-1, Table 5-1, and Table 5-2 at the\u00a0IRS.gov page<\/a>, if complied with, will satisfy the substantiation requirements for deducting meals, travel, and entertainment. If not complied with, the deductibility of these items is at risk.<\/p>\n

Gambling Winnings & Losses<\/h3>\n

Just when you thought that the \u201cwinner takes all\u201d in your mega-gambling haul, you receive a wakeup call in the middle of the night from the IRS. The IRS insists on getting, and is entitled to receive, its share of your gambling winnings in the form of federal income tax. Making matters worse, you could also be in a state that taxes gambling winnings.<\/p>\n

The following tips come from IRS Topic 419 \u201cGambling Income and Losses,\u201d and are applicable to casual, not professional, gamblers.<\/p>\n