Just like passing the ball into the end zone increases your risk of a turnover, some tax items create more risk of being flagged for audit. Here are some of the top "triggers."
It was fun listening to all the Monday (and Tuesday, and Wednesday) Morning Quarterbacks (and the Sunday Night Tweeters) state with complete confidence that if the Seahawks had handed off to Marshawn Lynch they would have won the game. How do we know he wouldn’t have been stopped or fumbled the ball? OK so he only fumbled 3 times all year. But there is always the unknown. Statistically, however, the pundits are correct that the Seahawks had a better chance of scoring with Lynch running than they did with a passing play.
As CPAs, we get asked if a certain deduction or a particular income might trigger an IRS audit. Overall, the IRS audited less than 1% of all individual returns in 2014. With large cutbacks in their budget we would expect this percentage to decrease in 2015. However, the IRS is using more metrics and statistics to look for ways to audit the returns most likely to generate the largest return to the agency in terms of additional revenue (i.e., penalties). So how do you keep your return from being audited? Well, just like passing the ball into the end zone, some items create more risk of being flagged for audit. Here are some of the top “triggers”. For the entire list, click here to request a copy.
1. Making the Big Bucks. While only 1% of all individual returns get audited, returns showing incomes in excess of $200,000 were audited at a rate of 1 for every 30 returns. Increase your income to $1 million and you have a 1 in 9 chance of getting chosen.
2. Taking large charitable contributions. The IRS publishes data on the average size of charitable contributions for various income levels. If you take a deduction for an amount that is much larger than the averages, you could hear from the IRS.
3. High mortgage interest. The maximum amount of qualified home indebtedness is $1.1 million (including home equity loan). A mortgage interest deduction that's in excess of a certain percentage of the debt limit could indicate an excessive deduction. With interest rates under well under 5%, deducting interest in excess of $55,000 may raise a few eyebrows.
4. Miscellaneous itemized deductions. Breaking the 2% of adjusted gross income threshold is difficult, so large miscellaneous itemized deductions may perk the interest of the IRS.
5. Home office. If you use a portion of your home exclusively for your business, you can deduct the expenses and depreciation associated with the space. However, you have to show the business connection and that the space was used exclusively for business. Both can be challenged by the IRS. The tax agency can also question the expenses involved in a home office. There's plenty of opportunity for an IRS auditor to make adjustments. In general, the higher the percentage of the home claimed for business, the greater your audit chances.
6. Rental losses. These could be challenged if there's no or very little revenue from the property. This is especially true on a vacation property at the beach or in the mountains.
These are only some of the items that can trigger an audit. What should you do if you have them on your return? If you’re entitled to tax breaks, it doesn't make sense not to claim them. Just make sure you have the required records and tax law justification to back them up. But why pass the ball when running can get you to the same place with less risk? For questions related to your personal situation, be sure to communicate with your tax advisor.
Jim White, CPA, is a Partner at The LBA Group in Jacksonville, Florida. LBA has been serving the accounting, tax and business consulting needs of entrepreneurial businesses, professional practices and nonprofit organizations for over 48 years. Jim serves as the Partner in Charge of the firm’s Healthcare Services Team and offers proactive, strategic tax, accounting and consulting services to a wide array of clients in this industry. Jim can be reached at jwhite@TheLBAGroup.com or 904.224.9775.
The LBA Group is a proud member of the National CPA Health Care Advisors Association (HCAA), a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at firstname.lastname@example.org or www.hcaa.com.