Want to meet an IRS agent?

Published 4:00 pm Thursday, June 27, 2019

“A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.” – Russell B. Long, U.S. Senator

The percent of tax returns audited by the IRS each year is less than 1%. But that figure doesn’t tell the whole story. There are many ways to increase your odds of being audited.

The best way to approach any situation is to put yourself in the shoes of the other person (or entity). I like to the think of the IRS as a business. Like all of us, they have limited resources and need to drive maximum revenue with those resources. Therefore, they will focus their audits (which require resources) on the taxpayers who are most likely to yield the highest return (unpaid taxes).

As you make more money, your chances of an audit will increase. Same goes for taking larger than average deductions. It makes good business sense. The IRS wants to fish where the biggest fish are.

Please – whatever you do – strive to make more money. Consider every dollar you receive a “certificate of appreciation” for a job well done. Just know that as you make more, you’ll need great advisors to keep you out of trouble.

Below are the top ways to grab the attention of the IRS (in case you were feeling lonely and want to spend a few months going through the audit process).

Taking Higher Than Average Deductions

Most tax software will tell you how your return stacks up to national averages. If you’ve ever looked at the stats, you’ll notice how uncharitable and in debt most of America is. Take pride in being different but know that being extremely charitable requires extra documentation for the IRS.

If you find yourself taking higher deductions than most Americans in your income tax bracket, double check your numbers and make sure you have detailed documentation ready to hand over to the IRS.

Writing Off Alimony

The rules around deducting alimony are complicated and the IRS knows that plenty of filers take the deduction who don’t meet the requirements. If you are deducting alimony, make sure you qualify.

Running A Small Business

Making over $100,000 in gross receipts on Schedule C bumps up your chances for an audit. Industries that have a lot of cash transactions are more likely to get grab attention as well.

100% Vehicle Use

Another biggie in the small business world. You must keep mileage logs to substantiate the business use of all vehicles (unless it is a specialty vehicle unlikely to be used for personal purposes). Mileage logs are a huge pain in the booty, so the IRS knows most people won’t keep them. Use technology to lessen the workload. There are lots of great apps that will help you keep track of your mileage. Find one that works for you and use it. Save that log in multiple places so you’ll have it when the IRS comes a calling.

Home Office Deduction

This is a great deduction if you qualify, but qualifying is not easy! If it is difficult to qualify for a deduction, know the IRS will pay special attention to those who take it.

Business Losses

If you make money elsewhere and claim losses or little income from your business, the IRS will notice. Businesses that look like hobbies will get special attention.

S-Corporation Losses

S-Corps have tricky basis rules and the IRS knows a lot of people mess them up. If you are taking S-Corp losses make sure you can prove your basis in the corporation.

Dumb Luck

You may not have any of these high-risk items on your return and still get pulled for an audit by the IRS. Odds are that sometime in our lives all of us will.

Use a tax professional and get them to help you understand how the information you gave them translated into what is on your tax return. Know the record keeping requirements and keep multiple copies of your documentation.

Taxes are a part of life and a large portion of our tax dollars are used for good purposes. Do your homework, keep your records, pay what you owe and sleep well at night.