An IRS Audit
Being audited by the IRS is up there with your least favorite activity, whether it is going to the dentist, dealing with your ex, getting a colonoscopy, or any other unpleasant experience you engage in. It is invasive and intimidating. However, for the chosen few, there is no escaping that dreaded IRS audit notice.
Here are five red flags that can trigger an IRS audit.
Having more contractors than employees
It is undoubtedly tempting to classify your workers as contractors rather than employees because let’s face it; payroll can be a pain in the you know what. Not only do you have to deal with the increased compliance of having payroll, but you also have to shoulder the additional responsibility of payroll expense. The IRS looks out for employers that misclassify workers as a way to avoid paying payroll tax. So if you have several contractors on your payroll, make sure you can stand the scrutiny of an IRS or state employee misclassification audit.
Claiming Excessive Miscellaneous Deductions
The Miscellaneous deduction line on your tax return can be a vehicle for hiding deductions that are not allowed by the IRS. At least that is how the IRS sees it. Because this deduction category is so generic and evasive, the IRS is suspicious of high and excessive miscellaneous expense amounts. It is good practice to itemize as much of your expenses as possible rather than classifying them as “miscellaneous.” This is not to say that there is no use for this category but make the use relevant, have a good explanation for items listed as miscellaneous, and keep it to a minimum. The above advice also applies to “other expenses” found on your 1040 schedule A.
Your Social Media and Online Presence
With social media and websites used as a means of providing exposure for businesses, the IRS, and states may sometimes poke around your online presence to compare what you claim on these sites to what you actually report on your tax return. For those of you obsessed with posting every aspect of your lives on social media, try not to claim a vacation you took as a business expense while posting pictures of that same trip with you on the beach and a frosted drink in one hand.
When I worked at the Department of Revenue, it was not unusual for me to look at a taxpayers website and social media pages as a way to compare what they claim on their website and social media sites to what was on their tax return.
Excessive Home Office Deductions
With today’s mobile climate, many w2 workers and self-employed individuals work out of their homes. Working out of your home entitles you to the home office deduction. Deducting an unusually large amount of expenses compared to your gross income can trigger and IRS audit. Make sure the in-home space you claim for business purposes is a reasonable size (calculated as a percentage of use) based on the type of business you operate.
Missing Any IRS Tax Deadline
Although missing IRS deadlines may seem trivial, doing so can trigger an IRS inquiry. It is advisable to try and comply with business and personal tax return due dates. If you are not able to file your return by the deadline, file an extension, but make sure you adhere to the extension due date. Another deadline, and dare I say the most overlooked deadline is filing of self-employment taxes. That is a topic for another post. The IRS assumes that if you are in the habit of missing deadlines, what else are you not complying with?
So let’s try to avoid the unpleasant experience of an audit by watching out for these five flags.
Have a great week!!!
Desarie Anderson, CPA, EA
Anderson Accounting, LLC