The IRS selects tax returns for audit based on certain preidentified target areas. Many returns are chosen for excessive deductions in one of the following categories:
1. Employee Business Expenses – Most true employees will have expenses they incur in connection with their job reimbursed by their employer. The excess of the taxpayer’s expenses over the reimbursed amounts is deductible as an itemized deduction called employee business expense. We have seen unscrupulous tax return preparers load up this deduction in order to get their clients a refund. If the deduction here is significant, expect to be audited.
2. Schedule C Losses (Business Losses) – Schedule C is an attachment to your indidivual tax return and it is where you report to the IRS the income you received in connection with a trade or business and the ordinary and necessary expenses you incurred to generate that income. The IRS targets Schedule C’s that show significant losses or losses for consecutive years. If you are conducting a true trade or business and just happen to have losses, you should incorporate the business and report the losses on a corporate return rather than on a Schedule C. The likelihood of being audited is greatly reduced for corporations.
3. Itemized Deductions as Percentage of Gross Income – If a taxpayer claims itemized deductions that are a significant percentage of his or her gross income, the IRS will select the return for audit. Generally, the IRS looks at the relationship between deduction expenses claimed and the taxpayer’s income to determine whether or not their might be a fraudulent or overstated deduction.
4. Home Office Deduction – Tax returns that include a deduction for the use of the taxpayer’s home as an office are often selected for audit. The rules for home office deductions are strict and many people (tax preparers included) run afoul of them. Others use the home office deduction to try to convert non- deductible, personal expenditures into deductible business expenses.
Before claiming any of the above deductions a taxpayer should consult a qualified tax attorney or CPA to analyze whether the benefit of claiming the deduction is worth the risk of being audited.
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1 How the IRS Selects Returns for Audit // Apr 10, 2009 at 12:44 am
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