There are three categories of people most likely to be audited: people in cash businesses, certain professionals and people taking unusually large deductions.
- Cash businesses are easy targets for the IRS. Many people in these businesses don’t declare all their income, and the IRS knows it. If, for example, your occupation is listed as a hairdresser, waiter or bartender, it may raise a red flag. If you regularly receive cash for your work, be sure to report all the money you earn, including tips.
- Professionals such as doctors, lawyers and accountants are also targeted. That’s because they generally run their own businesses and do their own bookkeeping.
- Large, unusual deductions are easily picked up by IRS computers. Although these deductions may be justified, they may still raise a red flag.
Which Deductions Are Likely to Be Challenged?
The IRS mandates that certain deductions must exceed a minimum percentage of your income before you can claim them. For example, medical deductions must exceed 7.5% of your adjusted gross income, and casualty loss deductions must exceed 10% of your adjusted gross income before you can claim them. Only a small number of taxpayers qualify, so if you claim these deductions, keep careful records.
The IRS is also likely to look at your contributions to charity. If you deduct more than the IRS’s statistical norms, you may be audited. You must have a receipt containing certain specific information (not just a canceled check) for any single donation of $250 or more. If you do not have a receipt, the IRS may disallow the deduction. A home office deduction may also be questioned. Keep accurate records if you deduct expenses related to a home office.
The IRS may also audit if they receive a tip that you are cheating on your tax returns.
