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5 Things the IRS Looks for in an Audit

When a taxpayer receives a notice from the IRS that the taxpayer’s return has been selected for an audit, there is no solace in knowing that such audits are rare – indeed, the overall individual audit rate is only about one in 143 returns. Even if the taxpayer is confident that every deduction taken is justified, even if the taxpayer is convinced that he or her return is complete, it is still unnerving to be required to sit down with an IRS agent and pore over one’s financial records.  We’ve identified 5 things the IRS looks for in an audit and which may put you on the IRS radar screen.

Issue One: Failure to Report All Taxable Income

Some taxpayers fail to remember that for every W-2 or 1099 form they receive, the IRS is getting a copy. IRS computers match the gross income you report with the figures it has on file. If they are different, you will likely hear from the IRS. The greater the discrepancy, the bigger the potential problem.

Issue Two: Excessive Charitable Deductions

Out of the 5 things the IRS looks for in an audit, your charitable deductions probably raises the biggest red flag.  So even if you have a heart of gold,  if you’re going to claim to have given a significant amount to one or more charities, be prepared to back up that deduction with the proper paperwork. The IRS compiles national data related to charitable giving. If your charitable giving is far out of line with American averages – particularly if you claim significant deductions of tangible property, rather than cash – the IRS will want to determine how that property was valued.

Issue Three: Home Office Deduction

If you’ve claimed a home office deduction, the IRS may be looking to determine if you maintain a dedicated space in your home that is used exclusively for business. If you operate a business from your family room, IRS rules do not allow a home office deduction.

Issue Four: Can You Support the Deduction Related to Business Mileage?

The IRS generally requires that you keep contemporaneous records of your business mileage. Do you have a daily log showing what business travel you engaged in each day? Failure to document mileage is one of the most common shortcomings among taxpayers. Also, if you have travel and entertaining deductions, be prepared to justify the business reason for the expenditures.

Issue Five: Excessive Expenses Related to Rental Property

Recognize that some repairs to rental property may not be deductible at all. Instead, the taxpayer’s basis in the property may need to be adjusted upwardly, with the cost amortized over a number of years. Excessive rental expenses are particularly problematic where the result is to produce sustained losses over several years. The IRS often takes the position that there is little reason for a taxpayer to continue to sink money into a losing business year after year.

Are You Facing an Audit?

Does your tax return contain one or more of the 5 things the IRS looks for in an Audit? Worse yet, have you received the dreaded notice from the IRS indicating that your return is under audit? If so, contact one of the Upstate New York tax attorneys or New York City tax attorneys at Mackay, Caswell & Callahan P.C. today. We have more than 30 years’ experience in assisting taxpayers with all sorts of tax-related issues, including audits. We have offices in Albany, New York City, Rochester, Syracuse, Utica, and Watertown. Don’t delay – we have a New York tax attorney ready to help you with your tax issues, so contact us today.