There are some deductions that are more frequently abused than others, so the IRS tends to pay closer attention to them. With that in mind, here are some tax deductions that could increase your chances of an IRS tax audit, and what to do if you're claiming any of them.
The home office deduction
This deduction is easy to abuse, intentionally or not, so it tends to get more scrutiny from the IRS. If you work from home, in order to qualify for the home office deduction, two conditions need to be met:
- The area of your home needs to be exclusively used for business. A computer desk set up in the corner of your living room doesn't count.
- The office must be your primary place of conducting business, and it must be used for business purposes on a regular basis.
Admittedly, there is some gray area here. For instance, what if half of a room is your primary business location and the other half is a playroom for your kids? The IRS' rules don't say that the space needs to be a separate room, just that it needs to be clearly defined.
If your home office obviously meets both criteria, this deduction is a no-brainer. If it's not so obvious, you should probably consult a tax professional before claiming it.
Rental real estate losses
Most people can't deduct rental real estate losses, but there are a couple of exceptions. First, you can deduct up to $25,000 of losses against your income if you actively participate in the renting of your property. This allowance begins to phase out for AGI above $100,000 and disappears completely for AGI above $150,000.
The second exception is for real estate professionals, defined as those who spend more than half of their working hours (minimum 751 per year) participating in various aspects of the real estate business. This group can write off losses no matter how large, or how high their income is.
The IRS has been cracking down on taxpayers whose returns show rental real estate losses, so be sure you're legitimately allowed to claim them.
100% business use of a vehicle
If you use your vehicle for business, you can deduct the costs of operation for that portion of the vehicle's use. This includes driving to client meetings, running errands for your boss, or going to a business location other than your normal office, just to name a few scenarios. Is does not, however, include driving to and from work (your normal commute).
It's fairly common to claim some business use of a car, even in businesses where it may not seem like it. As a personal example, when I was a teacher, I occasionally had to attend meetings at schools other than the one I worked at, and I was able to deduct those miles.
Where the IRS gets suspicious is when a tax return claims that a vehicle was used for business 100% of the time. Even when a business requires a lot of driving, this is extremely rare unless a separate vehicle is owned specifically for business. In the event of an audit, it's really tough to convince the IRS that your only vehicle wasn't used for any other purpose (getting dinner, taking the kids to school, etc.) throughout the course of a year.
If you pay alimony, it is deductible on your tax return and considered taxable income for the recipient, as long as these requirements are met:
- The payments must be made as a condition of a divorce decree or written separation agreement.
- The payment must be made in cash (or check/money order).
- The payment must be clearly designated as alimony (child support and other payment types don't count).
- The payer's liability must end when the former spouse dies.
Since the rules are a bit complex, and require two people to claim it correctly (the payer and payee), the IRS tends to take a closer look to make sure it was done properly.
Business meals, travel, and entertainment
Just like alimony, these expenses all have fairly specific requirements, both in terms of what qualifies and the documentation needed to claim the deduction. These types of deductions can especially attract the IRS' attention if they seem too large for your profession. For example, if you're in sales, it could make perfect sense to deduct dozens of plane tickets, hotel rooms, and business meals. If you're the owner of a local restaurant, these may seem a little far-fetched.
Any other deductions that are higher than average
The IRS invests considerable time and resources in analyzing Americans' tax behavior. As a result, they know what the average person's deductions are, and if yours are much higher than the norm, it could attract the IRS' attention.
For example, according to the IRS' latest statistics on income (SOI) report, the average taxpayer with AGI between $75,000 and $100,000 that had charitable contributions claimed a deduction of $3,328. So, if someone in that income range claimed a $10,000 deduction, it could warrant a closer look.
If you claim any of these...
The reason that the IRS pays close attention to these deductions is that they're frequently abused (intentionally or not) and some are rather lucrative. Therefore, if the IRS devotes more of its time and resources to investigating these deductions, it's more likely to find additional taxes to collect.
These deductions do increase the chances you'll be audited, but under no circumstances should you let the fear of an audit prevent you from taking a legitimate tax deduction to which you're entitled. However, because you're more likely to face questions from the IRS, it's important to take extra steps to make sure you can thoroughly document any of these if you're asked to do so.