ARTICLES: Behind the Abacus

When it comes time of the IRS to select certain taxpayers for audits, there are several “red flags” that they look for. These will dramatically increase your chance of being audited.



You make too much money. An AGI of over $200,000 will automatically increase your chances of being audited.



You didn’t report all taxable income. The IRS will already have a copy of every 1099 and W-2 issued to you. If you do not report one of those on your tax return, that is an automatic red flag.



You’ve taken large charitable deductions. Donations of over $500 increase your chance of an audit. Extremely larger donations will almost ensure an audit. Always retain all documents related to large charitable donations.



You’re claiming the home office deduction. Your home office must be used exclusively for the purpose of your business. Multi-purpose rooms, such as a media room, family room, or a desk in your bedroom or kitchen do not qualify.



You’re claiming rental losses. This applies for two scenarios only: you actively participate in the rental of your property and your AGI is under $100,000 or you are real estate agent who is also a developer, broker, or landlord.



You’re self-employed and deducting business meals as well as travel and entertainment expenses. Unless these deductions are legitimate and you can produce proof, do not do this, it is an automatic red flag.



You’re claiming a business vehicle. In order to do this, your vehicle has to be used 100% for business. Absolutely no personal use. Keep detailed logs and be prepared to prove this.



You’re writing off losses for a hobby. You may enjoy making jewelry, breeding dogs, or racing cars etc., but unless your hobby is actually your business, you cannot claim losses. You can only write off your expenses from a hobby up to the amount of income received from it.



You run a cash business. Statistically, cash businesses are less likely to correctly report income, making you an automatic target.



You didn’t report your foreign bank account. The IRS loves these. Having an offshore account is great, but if it contains more than $10,000 and was not properly reported or not reported at all, that will generate flags and severe penalties.


You make large cash purchases or deposits. Purchases or deposits of over $10,000 or sequential ones of $9,000 or similar are considered suspicious. Keep all documentation of purchases and deposits if you deal with large amounts.


You’re taking disproportionate deductions. If your deductions are disproportionate to your AGI, be prepared to prove these deductions if audited.