While audits are rare, most Americans would rather avoid them altogether. According to the Internal Revenue Service, a little more than 1 million individual tax returns were audited in 2016. The best way to avoid a tax audit is to understand the triggers that make you susceptible being singled out for this dubious honor.
- High income – Individuals who make over $200,000 annually have a greater likelihood of being audited. If you are in this income bracket, be sure to keep very concise financial records.
- Inconsistent deductions – The IRS keeps close tabs on the deductions that are normal for each income bracket. If your deductions seem out of line for the amount you earned, the IRS could ask for proof of your charitable contributions.
- Accurate numbers – Rounding your figures is viewed as questionable by the IRS and might make them consider the validity of the rest of your return. Always report the exact figures.
- Losses – Everyone has a bad year, but when the economic losses are consistent every year it could raise some concerns. It is important to remember that claiming a hobby as a business is not legal. If the IRS believes your business is a hobby, you will need to prove that you are motivated to make a profit in order to claim those deductions.
- Sole proprietor – If you file a schedule C tax form the IRS will take careful note of your deductions and will expect that your business has continuity and regularity.
- Entertainment expenses – While every business owner will deduct the occasional business lunch or special event, when it is done regularity, it could be questioned. Do not write off expenses that are not business related including taking friends out to dinner, family trips and other activities. Additionally, it is important to keep close track of actual entertainment expenses should you ever be questioned.
- Vehicles – If you choose to deduct both mileage and the vehicle expenses and claim 100 percent business usage on your depreciation form, you must keep very precise records of mileage logs, dates and the purpose of each trip in which the vehicle was used.