The IRS may initiate an audit if they find several red flags in the provided information by the taxpayer.
Generally, the IRS has up to three years after the filing deadline to initiate an audit, but the process can take up to six years if you omit 25% or more of your income.
Read some examples to find out what warning signs can trigger an IRS audit – and what you can do to avoid tax problems.
- Failure to report all sources and amount of income
Make sure there are no missing details, particularly W-2 and 1099s forms, as the IRS also get copies. Ensure that the numbers are the same; otherwise, expect a hearing. Keep all records even longer, as the IRS has up to six years to initiate an audit if you’ve neglected to report 25% or more of your income.
- You used the home office allowance.
The home office deduction can be a valuable break to help cover the costs of working from home. To qualify, you must use part of your home “regularly and exclusively” for business. The space must also be your principal place of business or where you meet regularly with clients.
- Reporting business losses
The IRS gets suspicious if your business never makes a profit. An audit red flag is businesses with net losses year after year or businesses that appear to break even barely. If your business has had a profit in three of the past five years, the IRS considers it a business, not a hobby.
- Questionable large business expenses
You may hear from the IRS if your business expenses are much larger than other similar types of businesses. The IRS compares deductions taken by taxpayers in the same income bracket or business type to find inconsistencies. Keep a mileage log to calculate the portion of the time you use the car for business – and defend your case if you’re audited.