Taxpayers are entitled to their proper share of tax deductions. But when your deductions are disproportionately large when compared to your income, it could increase your risk of an IRS tax audit.
The following are some deductions that may cause an IRS audit red flag if they are unusual or excessive on your tax return.
Business Expenses
Taxpayers who file Schedule C have the opportunity to deduct a variety of expenses. Some of these deductions can be abused or exaggerated, so the IRS pays close attention to unusual business expenses deductions.
Business travel and 50% of business meals can be deducted. However, the travel or meals must be business-related. Lavish or extravagant meals or accommodations may also be disallowed as deductions.
Another common business expense is the home office deduction. You should only take this deduction for the portion of your home used exclusively for business if you are claiming 80% of the square footage of your home as a home office, the IRS may become suspicious.
Make sure you keep receipts to back up all business expenses, and understand the IRS rules for determining whether expenses are business-related.
Business Losses
Some businesses have a net loss during a given tax year. This is especially true for new businesses that are paying startup expenses but haven’t developed steady revenue streams yet.
Business losses may be taken on your taxes. However, one key limitation is that you must actually be attempting to make a profit. If you are just doing an activity as a hobby, the IRS may audit your return and try to disallow your losses.
Charitable Contributions
If you have a modest income and a high charitable contribution deduction, your return could be flagged for an audit. There are several rules you must abide by when making a deductible charitable contribution:
- You must contribute to a qualified organization.
- If you make a cash contribution of $250 or more, you should receive a written acknowledgment of your contribution from the organization. Small donations can be proven with other records, such as a canceled check or a credit card statement.
- If you donate property, your deduction is generally limited to the property’s fair market value at the time of the donation. However, other limitations may apply to property that has appreciated in value.
Make sure you have the property documentation to back up your deductions in the case of an IRS audit.
If you receive an IRS audit notice due to unusual deductions on your return, contact a tax attorney for assistance.
The Gartzman Law Firm handles tax debt settlement, tax audit defense, and other tax resolution cases. Use our contact form to request a consultation with an Atlanta tax resolution attorney.