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5 Tax Breaks That Could Lead to an Audit In 2016

By Matthew Frankel, CFP® - Jan 18, 2016 at 6:03AM

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Any tax return could potentially get audited, but these things increase your chances.

Photo: via Flickr.

The IRS selects some tax returns at random to audit, but there are also specific triggers that prompt the IRS to take a closer look at a particular tax return. While you should never let the fear of an audit prevent you from claiming a legitimate tax deduction, it's important to know what tax breaks can put you on the IRS's radar so you can be sure to thoroughly document them, and prepare for the worst.

1. High charitable deductions
The IRS wants you to be generous. Any money or property you donate to qualified charitable organizations is eligible for a tax deduction. Unfortunately, like many other potentially lucrative deductions, this one gets abused from time to time, so the IRS tends to look closely at unusually generous people.

The IRS keeps track of how charitable the average taxpayer is. In a recent tax year, here is what the average taxpayer claimed by income level.

Income range

Average charitable deduction

% of taxpayers claiming






















$1,000,000 or more



Based on this, it's safe to say that if you earned $75,000 last year and claimed a $3,000 charitable deduction, the IRS might not think anything of it. On the other hand, if you claim $10,000, it's likely to get a closer examination. Also notice the column on the right: If you're in one of the lower income ranges, your charitable donations could attract attention, simply because it's not as common.

If you donate lots of money or property to charity, then by all means claim your deduction. Just be sure you can document every penny of it. The documentation rules are based on the amount of each donation, and here's some more information about charitable deductions so you can familiarize yourself with the process.

2. Medical expense deduction
If you're under 65, you can only deduct unreimbursed medical expenses that are more than 10% of your adjusted gross income (AGI). If you or your spouse are over 65, the AGI threshold is 7.5%.

As you can imagine, these thresholds exclude most taxpayers. By claiming a medical expense deduction, you're already putting yourself in a pretty exclusive club. According to IRS data, only about 12% of taxpayers with AGIs between $50,000 and $100,000 claimed a medical expense deduction, and that's when the threshold was 7.5% for everybody. Plus, with the new healthcare laws, the IRS will know whether or not you had health insurance for the year.

The point is that if you claim, say, a $15,000 medical expense deduction and have health insurance, it's easy to see why this might warrant a closer look.

3. Frivolous-looking business deductions
There are plenty of things you can potentially deduct all or a portion of as business expenses -- such as business meals, travel, and expenses you incur while entertaining clients. As you can imagine, this is easy to abuse, and the IRS is quick to audit returns with business deductions that seem excessive.

The IRS also knows that certain businesses deal with these expenses more than others. For example, if you own a convenience store and claim $10,000 worth of business lunches for the year, it may raise eyebrows at the IRS. On the other hand, if you're a financial planner courting new clients, such a deduction might make more sense.

The best course of action is simple. Don't call a meal a "business expense" unless that's what it actually was. Don't try to pass a family vacation off as "business travel" simply because you brought your laptop and got a little work done. And when you and your friends buy playoff tickets, don't try to claim that you were "entertaining clients."

In a nutshell, as long as you understand what the term "business expense" means, and don't try to loosely interpret its definition, you should have nothing to worry about.

4. Home-office deduction
Just like business deductions, the home office deduction has a lot of potential for abuse, so it's closely watched by the IRS. If you work from home, you're allowed to take a deduction for the expenses related to your home office. You can deduct the costs of electricity and other utilities, mortgage interest, and taxes related to that portion of your home.

For example, if your office occupies 200 square feet of a 2,000 square-foot house, you can deduct 10% of these costs. Or you can use the simplified method of a $5 deduction per square foot, up to $1,500.

The key to claiming this deduction is your office must be used exclusively for conducting your business. It cannot be a guest bedroom that doubles as your office when you don't have guests. Similarly, a computer set up in your kitchen or dining room does not make either of those rooms your "home office."

As long as you could prove you have an actual home office if asked, don't hesitate to claim the deduction you're entitled to. Just be aware that this is a potential red flag, and that you may be asked to provide additional documentation (such as a photo of the office).

5. Business use of a vehicle
If you are self-employed or own a business, you're allowed to claim a deduction for the business use of your vehicle. However, if you claim that you use your vehicle for business 100% of the time, it could cause the IRS to take a closer look.

Basically, unless you own a separate vehicle that you use exclusively for business, it's highly unlikely that your 100% claim is accurate. If you ever drive to the mall, take your kids to school, or even drive yourself to a doctor's appointment, you can't deduct 100% of the vehicle's use.

The best course of action is to keep a detailed mileage log of your business usage, and then compare it to your vehicle's total mileage at the end of the year. This may sound like a lot of work, but this is a potentially valuable deduction, and one that's important to get right.

What to expect if you get audited
Even if you do get audited, it doesn't need to be scary. A tax audit simply means that the IRS wants to examine your tax return. Some returns are chosen at random for an audit, while others have one or more red flags like the ones listed here that trigger an audit.

Audits come in three forms. A mail audit is easy -- you don't have to meet with an IRS agent, and this can generally be fixed by sending in a requested piece of documentation. An office audit is the next step up, and is commonly used when more than a few pieces of documentation are needed.

If your return raised serious red flags, or contains questionable information that can't be verified by mail, the IRS can conduct a field audit. For instance, if the IRS questions your home office deduction, it can ask to come evaluate your claim in person. Here's more about what to expect from each type of audit.

If the IRS does choose to audit you, it shouldn't be a cause for alarm unless you provided false information on your tax return. As long as you were honest and only claimed deductions to which you were entitled, an audit should be nothing more than an inconvenience.

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