5 Tax Deductions That Could Trigger an Audit
There’s a reason why so many people are nervous about doing taxes; it’s because even a small mistake could end up costing you a lot. If the IRS catches your mistake you might face more than fines – you could end up with an audit to contend with. Of course, the biggest mistake most people make is failing to check and double check to make sure everything is in order before they file. And a tax prep specialist can certainly help the average person here. But another common mistake that leads to audits revolves around claiming inappropriate deductions. In many cases, people are on the up-and-up when it comes to deductions, but certain write-offs have been abused frequently enough that the IRS now views them as red flags. And these are the ones you’ll want to avoid, or at least temper, in order to avoid being audited. Here are a few you should know about.
- Car donation. The main problem with this deductible is that many people value their automobiles more highly than, say, Kelly Blue Book might. It is for this reason that the IRS has imposed so many restrictions on the potential write-off that may be gained from donating a vehicle. In truth, this deduction is probably best avoided. But if you decide to use it anyway, make sure you know the letter of the law so that if an audit comes along you have evidence to support your claim of value.
- R&D. Many freelancers, sole proprietors, and small business owners use research and development liberally as a way to increase their write-offs. But in order to do this legally you must have receipts, and you may need to be able to justify how these expenses qualify as research and development for your business. Travel and entertainment fall under this category, as well. Of course, even justifiable expenses in these categories could trigger an audit if you have too many.
- Home office AND a work vehicle. In general, you should probably claim one or the other when it comes to these two expenses. Do you spend more of your day stuck in your home office, video conferencing and tapping away at the keyboard, or is the majority of your time spent beating the pavement on behalf of your business? The answer to this question could determine which expense to claim. Or you may simply want to figure out which is more profitable.
- Schedule C. Unfortunately, so many people have used this tax form to deduct expenses related to hobbies (by labeling them as sole proprietorships and claiming their expenses as business losses) that the form, in and of itself, has become something of a red flag for auditors. That said, businesses that have a legitimate claim of loss due to a sole proprietorship that fizzled have nothing to fear from using this form. So long as you have proper documentation in place an audit should be no sweat. Of course, if you have alternative options for filing that allow you to avoid schedule C federal tax forms altogether, you should probably use them.
- Charitable contributions. It’s sad to say, but people who are seen as contributing “too much” to charity within a given tax year may earn themselves an audit. Often, this type of red flag belongs to those who make more than a million a year (and donate to charity as a way to reduce the amount they owe the government). But generally speaking, the higher percentage of income you donate to charitable causes, the better chance you’ll be audited, so make sure the organizations you donate to give you the appropriate tax forms.