5 Red Flags Auditors Will Look For in Your 2012 Tax Return

Areas rife with abuse are watched with closer scrutiny

   

Increasingly, the Internal Revenue Service has been chasing the big tax cheats and top earners to uncover missing tax revenue.

But don’t think you are immune to an IRS audit just because you’re a middle-class working stiff. Often, a simple mistake or an honest deduction in an area rife with abuse means that you could wind up getting audited anyway.

Most average Americans think their chance of an audit is slim, and that’s not altogether untrue. Millionaires and big corporations have a higher chance to be audited because they have a higher tax obligation. Beyond these big guys, only about 1% of individuals taking home less than $200,000 annually are audited each year.

But while IRS is understaffed, it isn’t foolish; systems are in place to identify those most likely to be tax cheats and separate them from run-of-the-mill filers regardless of income levels. If your return boasts something the IRS sees as a red flag, it can dramatically increase the likelihood of an audit to your 2012 filing.

Here are five important items on your tax return that could grab you unwanted attention from the tax man, whether you deserve it or not:

Not Reporting All Your Income

This may seem obvious, but you must declare every penny you earned. Even the slightest variation from your filing and official IRS income records will set off red flags. So if you briefly held a temp job or did one or two freelance projects, you better track down the extra 1099s and W-2s no matter how small the income. If you miss them, there’s a good chance the IRS will flag your return simply because the numbers don’t add up.

Minor Mistakes on Major Info

Another common audit prompt is a simple mistake regarding very crucial information. Maybe you mixed up some numbers in your spouse’s Social Security number, or maybe you simply forgot to carry the 2 when adding up your adjusted gross income. The mistake may be honest, but unfortunately the IRS auditors don’t like mistakes. So double check every single line before mailing your form — especially if you’re a do-it-yourself filer who may be confused by some of the forms.

Home Office Deductions

Home office deductions were abused for many years by people who did a little work in the den in exchange for a lot of tax benefits they may not have deserved. Thus the IRS frequently audits those claiming home office deductions, making them prove “exclusive use” for business purposes. This is not to say you cannot claim a home office, of course, and those who are eligible can win big deductions for property taxes, utilities and insurance among other items. However, complying with IRS guidelines is key or else your deductions won’t survive the audit you could receive. That means no double-duty with the office functioning as a guest bedroom or a playroom for the kids, and avoiding seemingly benign dual uses including stowing skis or Christmas ornaments in the closet.

Frequent Business Vehicle Use

Just as it’s easy to mix personal with business use in a home office, business vehicles are ripe for unqualified deductions and thus a red flag for auditors. So unfortunately, as with the previous item, putting business vehicle use on your tax form can warrant IRS attention whether you deserve it or not. This doesn’t mean you can’t claim a business vehicle, of course, but make sure you have a detailed log with the date, destination and mileage for each trip — and that you don’t include stop-offs for coffee or dry cleaning. It’s very rare for a vehicle to be solely for work without a single personal trip all year, so be honest when you file and be aware that heavy business vehicle use means the tax man could likely come looking for your mileage log down the road.

Business “Entertainment”

If you’re self-employed, it’s tempting to claim lots of meals and travel on your tax return. However, while Schedule C allows for big-time deductions, it also historically has been a source of big-time overstatement. That means the IRS watches these kinds of items like a hawk. If you are claiming business-related trips and entertainment, it’s crucial to keep detailed records and receipts of who was there and what the event was for. Many Americans try to sneak in personal expenses here and that means even the honest filers risk a red flag by claiming legitimate deductions on their returns.

Check out IRS.gov website for resources regarding proper deductions and how to deal with an audit, including helpful tips on  proper record-keeping for self-employed taxpayers.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2013/02/5-red-flags-auditors-will-look-for-in-your-2012-tax-return/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.