When I came in ready for the work day, I came across an article on Kiplinger highlighting the 20 IRS red flags to prompts an audit by Joy Taylor, Editor. Although this article goes into some length about the 20 red flags, I agree with the majority of the article. I’d like to discuss the three most common red flags we see that prompts an audit.
- Differences in tax returns from one year to the next. This often happens when people change tax preparers. Although you would think that a tax return can’t have that many changes, you’d be surprised. There is nothing wrong with changing tax preparers, just make sure that you bring the last year’s return to the new tax preparer so they can review and keep with the similar return preparation.
- Taking higher than average deductions including charitable donations. Most people want to get the most out of their taxes such as higher refunds. In 2018 the new tax reform provided a higher standard deduction for everyone. This left millions of taxpayers with a better tax refund without having to itemize. Although, some saw a lesser refund than from years past. Many self-employed taxpayers were delighted to see that they owed less, while some others owed more. The purpose of the tax reform was to level out the deductions. Most people now just use the standard deduction rather than itemizing.
- Business deductions are one of the largest issues we see prompting audits for self employed individuals. The reason for this is the large amount of deductions. Most people are in business for themselves to make money, not to break even or worse, have a loss. Many start up businesses will operate the first three to five years at a loss or breaking even. After that, it is assumed that if the business is operating properly, it will start showing an increase in revenue. If the deductions result in a low net income, this is a red flag that will be very likely to prompt an audit. The IRS questions, why would a person be in business to break even or to work at a loss. Not likely.
