Only about 1% of all tax returns get audited each year, and of those that do, many are completely random. There are many items in a tax return that could potentially trigger an audit, but some tax deductions are better than others at attracting the attention of the IRS. Here are three of them.
Is that really a home office?
One of the best tax benefits for individuals who work from home is the home office deduction. This allows a deduction of either $5 per square foot of home office space, or the actual expenses related to the business use of your home, such as a proportional amount of your mortgage interest, homeowners insurance, and utilities.
However, in order to be able to legitimately claim the deduction, two things need to be true. First, the space must be used exclusively as a home office. A computer desk set up in a guest bedroom or another shared space doesn't count.
Also, the home office must be the principal place your business is conducted. Clearly, individuals who only work from home meet this requirement, but there is some grey area for those who also work outside the home. For example, if you're a sales representative and conduct business at your customers' offices, but use your home office to do all of your administrative tasks, it probably qualifies. On the other hand, if you have an actual office somewhere else, but keep a home office to catch up on work when you get home, you probably can't take the deduction. Here's more information about the home office deduction if you're interested.
Because of the specific definition of a home office and the potential for abuse, the IRS tends to take a closer look at tax returns that claim a home office deduction -- especially for people whose line of work doesn't typically require one.
Excessive medical and charitable deductions
The IRS is a pretty smart organization in the sense that it knows how much the average household donates to charity, and the average amount of medical expenses the average family incurs. If you claim a figure that is significantly out of the ordinary, it's a pretty good way to catch an auditor's attention.
For example, according to IRS data, the average tax return that shows adjusted gross income of $100,000 claims a $3,344 charitable deduction. So, a $4,000 deduction may not seem suspicious, but a $20,000 charitable deduction is likely to raise a few eyebrows.
Now, it's entirely possible to have a legitimate large charitable deduction. Maybe you donated a large item like a boat or a car, or gave a big one-time gift to your favorite charity. Just be sure you can back it up.
Also, since individuals under 65 years old can only claim unreimbursed medical expenses that exceed 10% of AGI, having this deduction at all has the potential to make your tax return stand out. In fact, only 10.1% of taxpayers with AGI of $100,000 have a medical deduction at all, and the average amount is $8,605. So, don't try to pull a fast one on the IRS and try to take a deduction for large medical expenses that were paid by your insurance. There's a good chance the IRS will want to see that you actually paid these expenses yourself, so be sure you can prove you did.
Using your vehicle exclusively for business
The IRS allows a deduction for the business use of your vehicle, which is generally defined as driving from one business location to another. Examples of this could include:
- Driving from your office to meet with a client.
- Traveling from one office to another.
- Driving from your office to get business supplies or to conduct banking activities.
- Driving to a conference or convention for business purposes.
This deduction can be rather lucrative. The standard mileage rate is currently 57.5 cents per mile, so 1,000 miles of business use translates to a $575 tax deduction.
Where people run into trouble is claiming 100% business use of a vehicle. For example, if you put 12,000 miles on your car in 2015, and you claim they were all for allowable business purposes, it can catch the attention of the IRS. Unless you own a separate vehicle to use for your business, it's highly unlikely that you never used your primary vehicle for a non-business purpose.
It's also important to note that commuting from your home to your principal place of business is never deductible. Whether you claim 100% or partial business use of your vehicle, be sure to keep a log that justifies the amount of miles you're claiming and the qualifying reason.
The bottom line on IRS red flags
If any of these situations applies to you, it does raise your chance of triggering an IRS audit. However, under no circumstances should you allow the fear of an audit to prevent you from taking advantage of a legitimate tax break.
The fact of the matter is that most audits are simply a matter of mail correspondence. For example, if the IRS is questioning an extremely large medical bill, sending a copy of the bill and a cancelled check showing that you actually paid it will probably close the case.
As long as the information on your tax return is 100% truthful, an audit should be nothing more than an inconvenience. Still, knowing what the IRS tends look at more closely can help you prepare for it.