While only the IRS knows the criteria for audits, some items are likely to increase your odds of an audit:
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- Not reporting all income on 1099s and W-2s. The IRS has a thorough matching program that compares all information reported on W-2s and 1099s to individual returns. Discrepancies result in a notice asking for an explanation or for payment of additional taxes.
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- Filing Schedule C or F. The IRS audits a higher percentage of returns that file these schedules.
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- Having itemized expenses that equal a high percentage of your income. While the IRS doesn’t disclose what it considers reasonable deductions, you may want to compare your deductions to the average deductions claimed by all taxpayers. Just because your deductions are higher than these amounts doesn’t mean you shouldn’t claim them, as long as you can verify the amounts deducted.
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- Claiming a home office deduction. While recent tax law changes will qualify more consultants and other self-employed individuals for this deduction, the rules are so complex that this deduction is likely to remain an audit target.
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- Incurring large business losses for many years. Since no profits are being generated, this situation may cause the IRS to view the business as a hobby.
- Taking a large casualty loss deduction. Since so few people qualify for this deduction, claiming it typically results in questions about the loss.
These are only some issues that could trigger an audit. While the risk of audit shouldn’t prevent you from claiming legitimate deductions, your tax adviser may want to attach an explanation of unusual items to your return.