Quick Nav

On The Money!

What Are the Top IRS Audit Triggers?

Thursday, April 7th, 2011
Q: What are the most common tax return “red flags” that will trigger an audit, and are there any new ones to worry about this year?

A: This year, the Internal Revenue Service has its eye on the wealthiest taxpayers, increasing the number of audits for taxpayers with adjusted gross income above $500,000. The audit rate for Americans earning $500,000 to $1 million rose to 3.4% from 2.8% for the fiscal year ended September 30, 2010, according to the IRS. Nearly 20% of those earning $10 million or more came under scrutiny last year—up from 11% in 2009.

But even if you’re not among the wealthiest taxpayers, you could find yourself being audited if your returns include certain items—or patterns of behavior—that raise concerns. Here are some of the most common audit triggers, and what you can do to protect yourself.
  • Under-Reporting Income. Failing to include all sources of income on taxpayer returns will nearly always result in an audit, and most of the audits relate to self-employed or small-business owners. Individual income taxpayers fail to report about 54% of income from sources for which there is no information reporting, such as sole proprietorships, according to the Tax Policy Center.
  • Several Years of Small-Business Losses. Report business losses for 2 years or more in a row on your Schedule C and you’ll raise suspicion from the IRS that your “business” is actually a hobby. And while business losses are deductible against other income, hobby losses are not. Reporting even a tiny profit would lower the red flag.
  • Schedule C Deduction Overload. While we’re at it, overloading your Schedule C with deductions that are not typical for the type of business you run—for example, taking a large deduction for mileage and wear and tear on your car when you’re working from home full-time—will attract IRS attention. If you do have special circumstances that warrant unusual deductions for your field, make sure you keep good records.
  • Home Office Gets a Break. If you, or your spouse, do work from home full-time or part-time, you no doubt fear the dreaded home office red flag. The good news is the IRS isn’t targeting this tax break with the same gusto it had in years past. Still, you want to be sure you’re claiming only the breaks you’re entitled to take. If you’re uncertain, check out IRS publication 587.
  • Home Buyer Tax Credit. Due to reports of rampant fraud associated with this federal stimulus program -- a report by the Treasury’s Inspector General found that thousands of individuals (including nearly 1300 prison inmates) defrauded the government by claiming this tax break—you will likely be asked for backup documentation to prove you’re eligible if you claim this credit.
  • Large Mortgage Interest Write-Off. If you have pay unusually high mortgage interest of $50,000 or more, you may draw IRS scrutiny. You’re allowed to write off interest on up to $1 million in mortgage loans, and interest on up to $100,000 of home equity loans or lines of credit.
  • Large Charitable Deductions. Overinflating charitable deductions is a perennial audit trigger, particularly if the donations are made in cash. If you have an unusually large deduction (for example, if you donate a used car or real estate), be sure to have documentation to back it up.
  • Round Numbers. Most taxpayers round off cents to the dollar when they prepare their returns, but if too many of your deductions are suspiciously round ($100, $250, $1000, $3750, etc) year after year, you may be communicating to the IRS that you’re playing fast and loose with the numbers. As always, keep good records to back up your reporting.
The Bottom Line: You should never avoid claiming a legitimate tax break simply because it is on IRS auditors’ radar—just make sure you have the documentation to back it up.

Do you have a personal finance or financial planning question? Email me at tcullen@hcplive.com and I’ll answer them for you and we’ll post answers (with no personal information) here at “On the Money.” Or you can leave a comment for your colleagues. You can also sign up for Physician’s Money Digest’s weekly eDigest email of money articles relevant to today’s health care professionals at www.physiciansmoneydigest.com/signup.
Blog Info
Terri Cullen, Managing Editor, Physician's Money Digest
Blog Description
This financial expert blogs on financial information, advice, and news you can use.
Author Bio
ABOUT TERRI CULLEN, Managing Editor, Physician's Money Digest

When Physician's Money Digest launched as a monthly print publication in 1994, the United States was powering out of its last recession, the economy was growing at a healthy 4% clip and unemployment was at its lowest levels of the decade. But Healthcare Reform under then-President Bill Clinton had just belly-flopped spectacularly, and doctors were fuming that legislators had failed to fix the flawed Medicare physician payment formula or nationwide medical liability reform.

Flash forward to today: The economy is struggling to claw its way out of the deepest recession since the Great Depression, and long-term unemployment is a record levels. But health care reform under the Obama administration passed with great fanfare--yet we're still are no closer to fixing the flawed Medicare physician payment formula or nationwide medical liability reform nor have we addressed reimbursement issues for pharmacists.

In my 13 years as a senior editor and columnist for The Wall Street Journal Online, I witnessed entire industries adapt and change in response to advances in technology and the changing global economy. But rarely have I seen a profession undergo such a dramatic reversal in fortunes in such a short amount of time.

The tough decisions law makers continue to put off until tomorrow are today causing an alarming number of doctors--and other health care professionals--to put off retirement, close or limit their practices, or eschew primary care as a profession entirely. In addition to providing customized personal finance and financial planning advice, this new blog for Pharmacy Times will cover financial topics of concern to all pharmacists as well--and I will answer specific questions from pharmacists as they plan their personal financial futures.

Now, more than ever, all health care professionals need to focus on their financial health, and this includes pharmacists from every segment of the profession. As Managing Editor of Physician's Money Digest, I remain committed to bringing readers the latest in-depth news, personal financial advice, and investing information that directly impact your practice and your pocketbook. Please continue reading here for financial information that will help you in your personal and professional life.
Blog Archive
Intellisphere, LLC
666 Plainsboro Road
Building 300
Plainsboro, NJ 08536
P: 609-716-7777
F: 609-257-0701

Copyright HCPLive 2006-2013
Intellisphere, LLC. All Rights Reserved.

Become a Member
Forgot Password?