When filing taxes, most of us make the effort to get them done right—to avoid getting an audit letter from the IRS. Depending on how much you claim or your deductions, you could set off a signal to the agency. Here are some of the top red flags that could send the IRS your way after submitting your taxes.
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1. Not reporting all of your taxable income
Those 1099s and W-2s that your employer sent to you in January…the IRS gets copies sent to them too. That’s why it’s important to make sure you report all your income on your tax documents.
When the IRS tries to match the numbers you report on your tax documents with what’s listed on your 1099s and W-2s—their computers will catch if the numbers are off and send you a bill in the mail.
If your W-2 or 1099 from your employer had incorrect income listed (too high or too low), you’ll have to ask your employer to file a corrected form with the IRS to avoid them from coming after you. And what about the income you earned on those side jobs? In most cases, you should have received a 1099 form documenting your earnings. If not, this is a case where it’s better to be safe than sorry and report that income as well.
2. Higher Than Average Deductions
If the IRS spots deductions on your tax filing that appear unusually large in comparison to your income, your documents could get pulled for review. For example, a very large home office deduction or claiming a hobby as a loss could put the agency on alert. However, if you have valid receipts or other documentation to support the deduction then you’re likely okay to claim it on your taxes.
3. Claiming Charitable Deductions
Generally, you can only write off charitable contributions on your taxes if you itemize deductions—and the charity is a qualified organization under federal tax law. Again, if you claim a rather large deduction compared to what you’ve earned for the year—you’re setting yourself up for pushback from the IRS.
Did you donate some very valuable property? If so, you would have needed it appraised in order to claim it as a deduction.
Did you make a non-cash donation of over $500? Make sure you file form 8283.
If you skip either of these steps and still claim these items as deductions, you’ll become an even bigger auditing target.
4. Reporting Gambling Winnings And Losses
For all the big gamblers out there, your winnings are fully taxable. You’re required to file your winnings as “other income” on the front page of your 1040 or Form 1040-SR.
Casinos or other venues could also submit your gambling winnings on a form W-2G to the IRS—which is why you don’t want to get caught keeping this information from your tax filings.
However, if you gamble for a living then you could report your winnings on a Schedule C as a self-employed individual. As a professional gambler, you can write off the costs of meals, lodging, and other gambling-related expenses. The best way to avoid being audited here is to make sure you claim both your wins AND your losses.
If you itemize your deductions, you can write off your gambling losses for the year on line 27, Schedule A (Form 1040). But the amount of losses you deduct can’t be more than your reported gambling income. For example, the IRS will know something’s not right if you claim you won $5000 gambling—but also report $20,000 in losses.
5. Writing Off A Hobby As A Loss
When making money off activities that are considered hobbies—jewelry making, coin and stamp collecting, dog breeding, and more—you must file a Schedule C to claim your losses. While you’re still on the hook to report any income generated from your hobby, you can deduct your expenses up to that income level.
However, the only way to write off your hobby as a loss is to manage it like a business and have a reasonable expectation for generating a profit. The IRS will likely get involved if it appears your hobby is really a business and you’re consistently turning around a profit.
6. Self-Employment Income Of $100,000 Or More
When it comes to self-employment, the more income and deductions you claim—the more likely you are to get audited. Even if you report your earnings accurately on your Schedule C form, the IRS may want to validate your calculations. This can sometimes cause people to underreport their income and overstate their deductions.
7. Working In Certain Industries
The IRS watches some businesses very closely because there could be a lot of tax issues with people who work in certain industries. If you work as an airline service operator, gas retailer, auto dealer, attorney, or taxi driver—you’ll want to make sure you’re on top of all your expenses.
Nobody likes doing their taxes. But as long as you file them correctly, you can breathe a sigh of relief and get on with your life.
*The content provided is intended for informational purposes only. Please contact a financial and/or tax professional regarding your specific financial and tax situation.
