3 Deductions That Could Lead to an Audit

Make sure you know the tax consequences of your actions.

Jordan Wathen
Jordan Wathen
Apr 3, 2016 at 10:40AM

Image source: IRS.gov

There are few things scarier than an IRS audit. Even if you've dotted your Is and crossed your Ts, some deductions lead to an outsize risk of an audit of your tax returns. Here are three deductions that can expose you to particularly high risk.

1. Charitable giving
Generosity can be rewarding, but it can also increase your audit risk. In general, the IRS takes particularly hard looks at people who donate a substantial portion of their income. But other filers may get scrutiny for so-called "in-kind" donations -- donating things like cars, or household items -- rather than monetary contributions.

Documentation always helps. A letter from a charitable organization can help prove that you made cash donations. If you made a non-monetary donation in an amount that exceeds $500, then you'll need to be sure to fill out a Form 8283. If your donation exceeds $5,000 in value, then you'll need to provide additional disclosure on that same form, and include an appraisal by someone the IRS deems to be a "qualified appraiser."

2. Deducting home office expenses
Self-employed taxpayers, from business owners to contractors, can claim a deduction for a home office. If you work from home, you can and should claim a portion of your home expenses for your home office.

However, you can only deduct the expenses for the amount of space you actually use. If you live in a 1,500-square-foot apartment, and use 300 square feet exclusively for your business, then you can claim 20% of your rent (or mortgage interest), utilities, property taxes, insurance, and even homeowner association fees.

The important thing here is that the space is used exclusively for work. Space you use for leisure doesn't count, nor do spaces that are not used exclusively for business. The IRS gives this deduction especially tough scrutiny because it's very much up to the honesty of the taxpayer. One could easily claim a significant portion of their home expenditures as being part of a home office, even though they don't have any dedicated office space at all. 

3. Unreimbursed exmployee expenses
Employers generally reimburse expenses that their employees pay for themselves, thus making this deduction one that gets increased attention from the IRS. Keep in mind that unreimbursed business expenses are only deductible when they exceed 2% of your adjusted gross income in any given year.

Expenses that are deductible run the gamut, from legal fees related to your job, to professional association fees, and even a passport for a business trip. The IRS publication 529 lists examples of items that qualify, but notes that most expenses that are common in your industry and "appropriate and helpful to your business" qualify.

The important thing to remember is that you should claim any deduction for which you rightfully qualify, and that, even with an elevated audit risk, the risk you get audited in any given year is still quite low. As a general rule, keeping proper documentation will help significantly ease the pain of an audit should it happen to you.