15 Ways to Invite an IRS Audit
There's no reason to pay more tax than is legally required, but there’s also no reason to make yourself a target for an Internal Revenue Service audit or to get your return flagged by the IRS' computers, which match billions of documents each year. So consider what situations might make you more likely to invite government scrutiny at tax time.
Be super wealthy.
This may seem like a "duh" moment. But the IRS finally is increasing the percentage of really rich people it audits, on the reasonable theory there's a lot more potential to uncover big dollars owed. It even has special "wealth squads" looking at all their holdings.
Hide offshore accounts.
It's not illegal for U.S. taxpayers to have accounts in Switzerland or Hong Kong or some Caribbean island. It's only illegal not to declare them or their income. Ask the ex-clients (some now convicts) of Swiss banking giant UBS.
Be a tax protestor.
Let's be blunt. The IRS simply does not like it when you claim you owe no taxes because the income tax is illegal or only applies to weird income categories that don't apply to you. Such wacky theories landed actor Wesley Snipes in jail.
Claim huge charitable contributions.
Rules require complete before-you-file documentation of your gifts to nonprofits. The IRS' use of correspondence audits, in which it demands you mail in the documents backing various deductions, makes claims of substantial contributions a tempting target.
Omit some reported income.
IRS computers are very good at matching all the little pieces of paper you get reporting your income with what you put on your 1040. These papers include employer W-2s and independent contractor, brokerage and bank 1099s.
Take a big home-based business loss every year.
The IRS presumes that a Schedule C business losing money three years out of five is not necessarily all that legitimate. You might have to produce evidence of a profit motive.
Claim a loss on a hobby.
By definition, a hobby is not pursued for profit. But that doesn't stop some taxpayers from trying to write off expenses for their dog showing, comic book trading or other “business."
Use a sleazy tax preparer.
The IRS' efforts to regulate all paid tax preparers were just shot down by a federal judge. But that doesn’t stop its ongoing campaign to ferret out and shut down the sleazy ones. When the feds get onto a tax pro playing fast and loose, his or her clients become easy target
Write off big unreimbursed employee business expenses.
They're only deductible beyond 2% of adjusted gross income. The IRS may use a by-mail audit to ask for back-up paperwork, thinking you are trying to write off ordinary work clothes, commuting costs and other not-allowed items.
Take deductions in round numbers.
The world is an uneven place. So if you file a tax return taking deductions ending in lots of zeros, the IRS might think you don't have the required paper backup. You risk an audit by mail.
Make math errors.
IRS computers are programmed to check your math. Returns with errors can invite scrutiny that might trigger more IRS requests for back-up information.
Brag a lot.
Laws require the IRS to pay minimum rewards for tips in cases that result in big collections. The neighbor overhearing your expansive claims may become a government informant.
Anger an ex-business partner, employee or spouse.
They might blow the whistle on you too. And it's possible they won't do it just for the informant's bounty.
Make careless mistakes.
These can include not signing a return, leaving off your Social Security number or miswriting it. All are red flags.
Fail to file on time or at all.
The IRS has a special program that will generate a substitute return using W-2 and 1099 paperwork. Don't expect it to allow your deductions.