Top 10 deductions that may make the IRS go hmmmmm!

By Andrea MacDonald, CPA

Each year, we file our taxes and cross our fingers in the hopes that we won’t receive a letter from the Internal Revenue Service. Why? Because that letter means your taxes are being audited. A tax audit is when the IRS performs an in-depth examination of your personal tax return to ensure complete accuracy. This happens when the IRS system flags anomalies in your tax deductions or total income. Tax deductions are deductions all taxpayers are legally allowed to claim to reduce their taxable income.

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To best prepare yourself for tax season, you should be aware of the following red flags that might put you on the IRS’s radar.

1. An Income Over $200,000

There’s not too much you can do to avoid this red flag, except report all sources of income.

2. Large Donations to Charity

Donating a significant amount of money to a charity that’s disproportionate with your income will trigger the IRS’s interest. If questioned, always provide documentation.

3. Foreign Accounts

Report your foreign accounts. Rules for foreign account reporting have changed. Taxpayers who have interest in or signature authority over foreign financial accounts must report them to the Treasury if the aggregate balance exceeds $10,000 at any time in the year.

4. Early Retirement Withdrawal

Withdrawing from a retirement account before the age of 59 1⁄2 for something other than a first-time home, education expense, or emergency medical issue will cause suspicion from the IRS. It can additionally lead to questions, especially if not reported on your tax return.

5. Claiming Rental Losses

If you are not a real estate professional, the IRS might ask questions if you claim rental losses, so avoid trouble by backing up your claim with documentation.

6. Unreported Income

If the IRS finds out about another source of income that you did not claim on your taxes, you will be audited. Being upfront and honest will allow for smooth seas ahead.

7. Owning a Business

Since many business owners have claimed falsely in the past, the IRS typically takes a closer look at business owners. Thus, make sure to claim your actual income and don’t claim exaggerated deductions.

8. Business Use of a Vehicle

As long as you are good at recording each business trip with the dates and mileage, you should be able to bypass any additional questions the IRS might have for you.

9. Excessively High Deductions

Claiming large amounts on deductions might raise a few alarm bells with the IRS, but it’s nothing that proper documentation can’t solve.

10. Large Business Expenses

If you claim a large amount for business meals or travel, be prepared to validate your deductions with documentation.

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Andrea MacDonald, CPA is the owner of Pro Tax & Accounting in Chesapeake, Virginia. For nearly two decades, she has been working with businesses on their bookkeeping, accounting, and taxes. She also works with individuals and families on their tax returns. Andrea is a Certified Public Accountant (CPA) and a qualified bookkeeper and tax professional. She is well-versed in tax law, which makes her an invaluable resource for any business.

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Resource: IRS Help