Forgotten income

Remember that you’re a write off to someone — and possibly plenty of someone’s refund. So, just because you neglect or forget to report a source of income doesn’t mean the individual or company that paid you will forget. Leaving out a small amount that the IRS eventually learns about, will raise suspicions that you left out other sources of income. So, don’t risk it — report everything. Audits will cost you much more than you would have saved by leaving that money out.

Failure to follow foreign accounts rules

Any foreign banks you have money in are required to report the highest amount in your account for the fiscal year to the government. Don’t ballpark your amount; overseas banks are in close communication with the U.S. government.

Blurring the line between business and personal expenses

It’s worth speaking to a CPA when calculating your business expenses. The IRS uses occupational codes to calculate a standard amount of business expenses for each profession. Amounts that go over too much will raise a red flag. CPAs will be familiar with these codes. In general, if it’s not strictly business related, don’t write it off.

Having an income larger than $200,000

In recent years the IRS has only audited 1% of those earning under $200,000, but audits for those over that income range were as high as 4%. Those in the $1 million and over range experienced a 12.5% audit rate. The IRS isn’t targeting high earners, but high earners tend to have more complex returns with extensive write-off’s and more varied sources of income.

Claiming large charitable deductions

Don’t attempt to turn the money you spent on the cookies you bring to church every week into a charitable deduction. If the total sum of your donations is disproportionately large in comparison to your income, it’ll raise a red flag as the IRS will assume you’re turning personal expenses into charitable ones; or you are overestimating the value of property/belongings you donate.

The home office deduction

If you do work mostly or entirely from home, you are entitled to writing off a portion of your rent, real estate taxes, utilities, Internet and phone bill. However, the IRS likes clear lines: choose a space in your home and use that space exclusively for work. The IRS has had great success in overruling home office deductions when persons report multiple rooms in the home, or a large portion of the home. And now that they’ve discovered their success in this area, they look for the red flag.

Rental losses

Should the value of your property go down when you are living in it — especially if you did not do the work to make necessary fixes — in most cases you cannot make real estate loss deductions. However, those renting out their property can write off up to $25,000 in property value losses, so long as their gross adjusted income is under $100,000. Be sure to report exact amounts of how much work on the property costs you and get actual appraisals. If the IRS suspects you’re playing the role of real estate pro and ballparking these figures, that’s a red flag.

Entertainment, travel and meal deductions

The IRS understands that to make money you need to spend money. They also recognize when an entertainment, travel or meal expense is unreasonably high, considering the profit that probably resulted from that expense. Hold onto all receipts and documents that show the cost of the expense, who attended and the business purpose — especially if your deductions in this category are high.

Claiming a business vehicle

The IRS recognizes that it is highly unlikely that every single mile driven in a business vehicle is business-related, especially when the driver has no separate personal vehicle. Reporting your vehicle as 100% a business vehicle raises a big red flag. If you do use your car for both business and personal reasons, keep a detailed log of miles driven, destinations, and the purpose of those trips.

Writing off a hobby

The write off of any activity in which you enjoy yourself already raises a red flag. If you’re going to write off hobby expenses, be sure you’re actually making a profit off of that hobby. Because a hobby is entertainment, have documents that prove you conduct that hobby in a business manner. And take it easy on the entertainment expenses around that hobby  (drinks, meals, wardrobe).