‘Triggers’ That Increase Chance of IRS Audit
The Internal Revenue Service works in mysterious ways.
The federal government’s feared tax-collecting agency swoops down and audits only 1% of tax returns. No one knows exactly what makes the IRS choose the returns it audits. But the experts at Matthew Bender & Co., which publishes tax guides, maintain that there are at least nine “audit triggers” that boost the chance of getting audited.
The audit triggers are essentially sore points with the IRS--deductions that the agency believes are frequently bogus or overstated. Many taxpayers, of course, have legitimate deductions in “triggered” categories, and shouldn’t hesitate to claim them.
But when people know they’re flirting with an audit, they should keep particularly good records to support their case. Furthermore, though one item may have triggered the audit, the IRS isn’t prohibited from looking at all other items as well. Accurate, detailed and organized tax records are pivotal.
Here is a current list of audit triggers and the information you need to support the deductions.
* Unusually high deductions: If your deductions for medical expenses, state and local taxes, interest expense and charitable contributions are much higher than the norm, experts believe your return is ripe for an audit. The IRS publishes average deductions based on income level each year in its “Statistics of Income” bulletin.
The figures published are a few years old. The 1991 guide, for example, gives 1989 statistics. Nevertheless, it gives an idea of the usual ranges. Individuals earning between $20,000 and $25,000, for example, averaged $3,362 in medical deductions, $1,688 in offsets for state and local taxes, $4,092 in interest deductions and an average of $1,178 in charitable contributions in 1989. If your deductions are much higher, make sure you keep all receipts.
* Donations of appreciated property: If you gave real property, such as art or jewelry, to charity last year, your return is likely to be more closely scrutinized than others because the IRS suspects that many people pad valuations of such donated goods. Make sure that you have a current appraisal of any costly donated item to substantiate the deduction.
* Tax shelters: Real estate, oil and gas, and other limited partnerships that provided high tax write-offs for relatively small investments have been the target of IRS scrutiny since the mid-1980s. They remain a top audit trigger even though their use has diminished in recent years. Those who participate in such shelters should contact a tax adviser to determine their best course of action.
* Travel and entertainment expenses: Those who deduct unreimbursed business travel and entertainment expenses are also likely to generate tax audits. If you want to claim such expenses, make sure you keep daily records of who was entertained, for example, and for what purpose and at what cost.
* Business use of an automobile: Individuals who use their personal car for work know it has also become increasingly difficult to deduct these expenses. Those who wish to write off wear and tear on their car must use it for business more than half the time--and the commute to and from work doesn’t count as business mileage. Otherwise, deductions are restricted to a simple 28 cents per mile. A mileage log, which delineates where and why you’re traveling, is recommended.
* Home office expenses: More Americans than ever before are working from home, but deducting your work area and office equipment as business expenses continues to be difficult and tricky. The IRS uses home office deductions as an audit trigger, and disallows many taxpayer claims, Bender experts say. Taxpayers willing to take the issue to court, however, can often win if they spend a substantial amount of their work day at the home office and don’t use the area for other purposes, according to Theodore E. Degnan, associate professor of accounting at the University of Texas-Pan American in Edinburg, Texas.
* Casualty losses: If your house was one of the many consumed by fire or flood and not completely covered by insurance last year, there’s no doubt that you have a legitimate casualty loss. However, if you suddenly discover a termite infestation or your floor caves in because of a slow leak in your water pipes, you may not. If you’re unsure, contact a tax adviser.
* Hobby losses: Is it a hobby or a business expense? The answer determines whether you can write off any losses suffered against ordinary income or if you can only claim the losses to the extent that you have hobby income. The rule of thumb is if you make a profit three years out of five, it’s a business. Otherwise the IRS will probably call it a hobby and you could have to go to tax court to prove it’s something more.
* Barter income: The IRS has become more efficient in matching income on one taxpayer’s return to expenses on another. If you fail to report barter income, you might get caught. What’s barter income? The non-cash exchange of valuable goods or services. For example, you agree to perform legal services for a contractor in exchange for work on your house.
