3 Tax Deductions That May Increase Your Audit Risk
It’s tax time again. If you’re reading this now and still haven’t filed your tax return, you need to stop procrastinating and get to it (or ask for an extension). Fortunately, audits are down again this year, thanks to budget cuts at the IRS. That doesn’t mean you won’t get audited, it just means it’s more unlikely.
In a way, budget cuts that reduce staffing at the IRS is a good thing. After all, smaller government means we spend less on salaries. On the other hand, cutting IRS jobs actually means we’ll collect less revenue for the country.
The right thing to do is have the IRS focus almost exclusively on the rich. After all, auditing a multi-millionaire will surely nab you a few million dollars. Whereas an audit of a family making $50k won’t get you much.
While the IRS does indeed target the rich more, there are times your own actions can inadvertently raise a red flag. If you make obvious errors or omissions on your tax return, you can trigger an automatic audit. But other times just taking certain deductions can boost your chances of getting that dreaded letter from the IRS.
Here are 3 tax deductions that increase your odds of an audit.
Making a contribution to a non-profit charity makes us feel good and helps a cause we care about. It also can reduce our tax liability. But if not done right, it can also lead to an audit.
One easy way to raise a red flag is when you claim you donated a large portion of your salary to an organization. You might have heard some people give 10% of their income to the church, but if you gave up half your money, it’s going to look suspicious.
If you’re a freelancer or have a side hustle, you own your own business. One of the benefits of running your own business is being able to deduct business expenses on your tax return. But some people take advantage and claim too many things that don’t qualify.
As far as triggering an audit goes, two deductions seem to ring the alarm bells: the deductions for a home office and for business miles driven. This doesn’t mean you can’t take those deductions, you just have to make sure you qualify, so if there is an audit you have all your paperwork.
To take the home office deduction, the space has to be used exclusively for work, so a bedroom/office doesn’t qualify.
For 2017, mileage deductions are worth 53.5 cents per mile for business use of your car. If you claim that you use your vehicle for business 100% of the time that’s going to raise a red flag. In the event of an audit, you’ll need to keep detailed logs itemizing the miles you’ve driven for business-related purposes.
Medical expenses such as prescription medicine, eye exams, dental treatments and acupuncture qualify, but others do not.
It needs to be a qualified medical expense to count. So a gym membership doesn’t count, even if it’s used to lose eight on doctors orders. Cosmetic things don’t count either, such as teeth whitening or plastic surgery.
You can only claim medical expenses if they exceed 10% of your adjusted gross income (AGI). So if you earned $50k, you can only claim the medical expenses that go over $5,000.
If you have legitimate deductions to make in your return, by all means do so. An audit will still be unlikely, but in the event it does happen, it will be okay as long as you have the documentation to back up your claim.