With each passing year, my tax return gets more complicated.  I remember the good ol’ days of the 1040EZ form.  It was a one sided form that took about 30 minutes to complete and double check.  I always got a refund and in those days I wondered why everybody made such a big deal of something as simple as taxes.  I had heard of audits but didn’t know anybody who had actually been audited.  After all, I was in college.  If the IRS wanted to audit me or any of my friends, I would take my 1040EZ and my one W-2 showing a few thousand dollars in income and listen to the auditor laugh.

 

Have times changed in my life!  Now my return is a small book with schedule this and that, worksheets, itemizations down to each second hand shirt I donated to Good Will and a whole lot of other sheets that I would be hard pressed to have to explain.  Because of some of my investments, personal income, and deductions, I now run a real change of getting audited.

 

Since the late 90’s, the IRS has been the kinder, gentler IRS.  They were asked by congress to be a better friend to the taxpayer instead of having the reputation of the big bad wolf.  Now, with billions and maybe trillions being used to stimulate the economy, rumors abound about the IRS possibly going back to the days when Uncle Sam was pinching pennies.

 

I thought I would include a short list of things the IRS looks at as red flags that may cause an audit:

 

1.)    If you are a high wage earner, the IRS is going to look at your tax returns very closely.

2.)    If you have anything other than basic income wages.  Contract payments, for example, may send up a red flag.

3.)    Unreported income such as investment returns.  Remember that your broker is reporting all of your activity to the IRS.  Make sure you do the same.

4.)    Home based businesses.  Especially those with home office deductions.

5.)    Non cash charitable deductions.  If you don’t have documentation, you didn’t donate it in the eyes of the IRS.

6.)    Large entertainment deductions.  The IRS knows that many people try to catch some extra deductions here.  They also know that it’s easy to catch you in the act.  If you are a factory worker, for example, the IRS will be very interested in hearing how entertainment expenses relate to your job.

7.)    Excessive Auto Usage-  So you’re a delivery driver for FedEx yet you have 10’s of thousands of miles in automobile deductions?  Red Flag!

8.)    Losses that were probably personal-  You claimed $12,000 in losses from your “business” of automobile repair although you don’t actually have any of the legal documents establishing this as a business?  Red Flag!

 

Nobody is saying that you should avoid returns that you honestly qualify for.  Please do even if they may cause you to be audited.  Just make sure that you have all the documentation in case you are called.  If you fall in to one of the scenarios above, make sure you keep everything that would establish your case.