The IRS audit: Everyone dreads it and so few know how to handle it!
Fortunately, the good news is that audits are less common in general because of a severe budget crunch at the IRS.
Last year, the number of people audited by the IRS dropped by 16% percent from the year prior. Less than 1% of taxpayers — 0.7% to be exact — were audited, according to an analysis done by the Associated Press.
Fewer audits of the in-person or mail variety are taking place because there are fewer staffers on hand at the IRS to get the job done.
Since 2010, a contracting budget means the IRS has had to let go of more than 17,000 employees, and that number included nearly 7,000 enforcement agents. That’s almost 20% of the workforce gone over the last seven years!
But just because headcount is thinning at the IRS, that doesn’t mean you’re completely immune from being audited.
Read more: 2017 estimated tax refund schedule
You may have a bull’s-eye target on your back if you…
1. Claim a home office deduction
You need to have a dedicated space in your home that is only used for business to take advantage of this deduction. Doing so lets you prorate some household expenses such as utility bills, homeowner’s association fees and more on a fractional basis. You have to figure out exactly how much square footage is dedicated to your business in your home vs. how much square footage you have in your home at large. Of course, this area is also ripe for abuse! You’ll need to be able to prove the area you’re claiming is separate and exclusive for business use.
2. Give a lot of money to charity
The IRS knows what others who make similar income to you tend to give, and they will question you if you’re claiming too much. Again, the key is to have accurate and complete documentation to prove you’ve made the donation and to prove the value of the donation if it’s non-monetary. But even then, there’s something of a surprise factor because of how some donations play the car donation card. In general, one of the least scrutinized ways to make a donation is with good ol’ pen and paper. As USA TODAY notes, ‘Gifts by check are hard to falsify.’
3. Deduct unreimbursed business expenses
Unreimbursed business expenses are only deductible beyond 2% of your adjusted gross income, and most workers already get reimbursed by their employers for such out-of-pocket expenses. But if you don’t get that reimbursement, things like dues, license fees, subscriptions to trade journals, tools and supplies and specialty uniforms are all legitimately deductible. The gray area here is when you get into deductions for non-allowables like commuting costs and everyday work clothes. Again, the IRS knows what is outside normal bounds based on your income and will question you if you’re too far out of the norm.
4. Use digital currencies
The IRS recently sent a John Doe summons to Coinbase, the largest Bitcoin exchange in the United States, to get a list of all customers who purchased virtual currency from the company from 2013 to 2015. They were looking for tax evaders.
6. Don’t report taxable income
You must report all 1099s and W-2s, even if you believe them to be incorrect. (You should deal with the discrepancies after filing.)
7. Claim day-trading losses on Schedule C
If you know anything about Clark, you know he invests for the long haul — not for short-term gain! Check out his investment guide here.
8. Claim rental losses
Being a landlord is tough, but it’s definitely one route to building long-term wealth. Becoming a landlord begins with finding the right tenant. That way you’re less likely to incur rental losses in the first place!
9. Deduct business meals, travel and entertainment
If you’re in business for yourself, you’ve got to see our Business & Entrepreneurs section!
10. Claim 100% business use of a vehicle
Be careful, salespeople! To counter any possible IRS questions, consider keeping a paper log on the dashboard and writing down every mile for work, the date and what it was for. If you do want to claim all the cost for a business expense, be sure you have another vehicle too.
11. Write off a loss for a hobby
Maybe you have a hobby that’s also like a side hustle for you because it earns you money. There’s a very fine line here when it comes to the ability to write off a loss. Be sure you know what the IRS says on the matter!
12. Taking an alimony deduction
In order to make this work, a divorce or separation decree must be in effect — and even then there are a lot of rules governing this deduction.
13. Running a business where almost all money is in cash
When you’re dealing all in cash, it’s easier to fudge the numbers because the IRS has to take you at your word. There’s no credit card processor to give its accounting of your business. So expect to get extra scrutiny if you run an all-cash operation!
14. Not reporting a foreign bank account
Offshore accounts have always been a key target for the IRS.
15. Engaging in currency transactions
Clark has spoken often about the dangers of forex. This is one get-rich-quick scheme that’s better left alone.