Top Ten IRS Audit Triggers

See our updated IRS Audit Triggers 2012

The IRS simply doesn't have the resources for human oversight and scrutiny over every tax return. Instead, the IRS uses computers to look for returns that show certain traits that are similar to returns that have been audited and adjusted in the past. Returns with those triggers are marked for human oversight.

If your income and deductions are legitimate and documented, don't be afraid to claim what's rightfully yours. That being said, the top ten triggers are described below.

1. Reporting Incorrect Taxable Income

As you receive 1099s and W-2s, the IRS does as well. Failing to report all of your taxable income is a sure way to trigger close scrutiny. If you get a 1099, check it against your own records to be sure it is correct. If it isn't correct, don't ignore it. Request a corrected form from that issuing company and ask that they file the corrected form with the IRS.

2. Returns Claiming the Home-buyer Credit

Significant credits always attract the less ethical. That's especially true of "refundable" credits - where even with no tax paid the credit is issued. Because the home buyer credit has been claimed fraudulently with some regularity, and because of the special qualifications, expect close scrutiny of your return if you claim this credit yourself.

If you claim the Home-buyer credit and sell your home within three years for homes brought in 2009 or 2010, or within 15 years for homes bought before 2009, you can expect to pay this credit back. The IRS checks real estate databases for sales of any homes for which the Home-buyer credit was taken.

3. Large Claims of Charitable Deductions

Again, when a credit is significant, the likelihood that others have abused the credit is very high. Large deductions for charitable contributions have frequently been adjusted on audit, and so returns with large deductions (compared to reported income) can trigger very close scrutiny.

Be sure to get an appraisal for donations of valuable property, and file form 8283 for donations over $500. As with all deductions, be certain you have all your documentation, including receipts for contributions and follow the IRS rule for documenting deductions of this type.

4. Home Office Deduction

The Home Office deduction has rigid qualifying requirements - especially the requirement that a home office can only be used for business purposes. A den or spare bedroom with a computer and a phone doesn't qualify if that room is used for any other purpose. A very high number of returns with this claim have been adjusted on audit.

5. Business Travel, Meals and Entertainment

The qualifying rules for Schedule C deductions can be very rigid. Rules for documenting these claims are rigid also, and most returns claiming business travel, meals and entertainment simply don't meet the IRS standards. This is especialy true if deductions seem too large for the business.

If you plan to claim deductions on your Schedule C, be aware of the qualifications and rules for the necessary documentation.

6. Claiming Business Use of Vehicle

The IRS is aware that vehicles are only rarely used as "business only". IRS agents scrutinize these claims and look very closely at your records - which, again, must follow certain specific rules. You'll need detailed mileage logs, calendar entries and purpose of trip for every instance of use. As with all the triggers listed, this deduction has been abused. It's an old, familiar issue with the IRS and they know how to dig out any inconsistencies to disqualify the credit.

7. Claiming Losses for a Hobby

While you must report income from all sources, including hobbies, you cannot claim losses on hobbies. Trying to claim a loss for activites that aren't run with potential for profit and without complete documentation of expenses will likely bring you unwanted attention.

The IRS will consider your activity a business only if you make a profit in 3 out of 5 years. But, you must prove that the activity is a business by running it as one. All of the documentation you keep for a business must be kept for your hobby before you can expect to claim a loss for that activity in a down year.

8. Cash Businesses

Cash businesses and employees in cash-based jobs - like construction, beauty salons and restaurants, are more closely watched than others. Historically, some number of persons in businesses where cash changes hands don't accurately report their taxable income. Frequent adjustments at audit for cash businesses have made this a trigger for close scrutiny.

9. Errors on the Return

Take the time to review your calculations. If you make an error in your favor, you will hear form the IRS and there is a much higher risk that your entire return will be pulled for audit. It happens enough to make our list of top triggers.

10. Unusually High Deductions

If your deductions in a given year are drastically higher than deductions you've claimed in the past, the IRS will want to know why. Also, if deductions you claim are completely out of proportion with your reported income, the IRS computers will spit out your return and an agent will be looking at it to find out what's going on.

As we said in the beginning, if your deductions are legitimate and documented, you do not need to fear close scrutiny. In all cases, meeting the qualifying requirements and maintaining the necessary documentation are the keys to surviving this kind of human oversight. If your deductions are legal, real and documented, don't be afraid to stake your claim.