Last year, we pointed to Kiplinger.com’s 14 red flags (list below) the IRS looks for when considering a tax audit. As we’re back in the final month of this year’s tax return filing season, we thought we’d share a couple more red flags Kiplinger.com has added to the list.
1 | Not Making Enough Money
Too many years of losses can make the IRS think you’re not really taking your business seriously enough — that it’s just a hobby. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you’re in business to make a profit. If you don’t hit those numbers, get ready to answer some questions.
2 | Claiming the Home Office Deduction
Business owners can deduct a percentage of rent, real-estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. But according to Kiplinger, there’s no getting around the fact that the IRS is drawn to returns that claim home office write-offs.
SmallBusiness.com Information on Home Office Deduction
Last year’s red flags
Last year, we shared 15 previous red flags the IRS looks for when considering an audit.
1 | Running a small business
2 | Making a lot of money
4 | Taking higher-than-average deductions
5 | Reporting large charitable deductions
6 | Claiming rental losses
7 | Taking an alimony deduction
8 | Writing off a loss for a hobby
9 | Big deductions for business meals, travel and entertainment
10 | Failing to report a foreign bank account
11 | Claiming 100 percent business use of a vehicle
12 | Taking an early payout from an IRA or 401(k) account
13 | Claiming day-trading losses on Schedule C
14 | Gambling: Failing to report winnings or claiming big losses
15 | Engaging in currency transactions
As we noted last year, statistically, very few people have their personal tax return audited. But some do, and those who own businesses are more likely than others to be audited.
0.84% | Percentage of all individual tax returns audited in 2015