4 Red Flags for an IRS Audit

a woman reviews tax paperwork with concern about an IRS audit
12/21/2024 By: Money Mastery

The IRS hired a lot of new auditors this year, which has led to many concerns from business owners about whether they’re at risk of an audit. While factual and consistent reporting are always the most important considerations for tax prep, there are some things that might evoke a double-take. Here are the top 4 red flags for an IRS audit from the experts here at Money Mastery LLC: 

#1 - Claiming a Home Office Deduction

This doesn’t mean you can’t or shouldn’t claim your legitimate home office. Just know that the IRS has a rigid definition of what qualifies as a home office. You can view the full guidelines on the IRS website, but it comes down to two simple requirements. First, a home office must be regularly and exclusively used for business. This means no converting a space back-and-forth between business and family use, and no “occasional spaces.” Second, a home office must be the primary place of business, meaning you can’t have a business office and elect to deduct the home office as well without raising some red flags. Since business owners often claim deductions for a home office without fully fitting this definition, it’s something they may be inclined to look at a little closer, but don’t let that stop you from claiming a home office if you have a dedicated work-from-home space. 

#2 - Ignoring the IRS Dirty Dozen List

The IRS warns taxpayers of over a dozen schemes and actions associated with fraudulent filing each year. While most of these are easy to avoid, sometimes they might surprise you. The 2023 IRS Dirty Dozen List includes: 

 

  • ERC (Employee Retention Credit) claims
  • False fuel tax claims
  • Fake charities
  • Unqualified OIC (Offers in Compromise)
  • CRAT (Charitable Remainder Annuity Trusts)
  • Monetized installment sales
  • Micro-captive insurance arrangements
  • Syndicated conservation easements
  • Offshore accounts and digital assets
  • Maltese retirement arrangements
  • Puerto Rican and foreign captive insurance
  • Unscrupulous tax preparers 
  • The various phishing schemes, scammers, and bad advice rampant online 

While some of these are more obvious than others, if you’re concerned that you may be doing something on this list, it’s definitely worth double-checking and talking with your tax preparer. You can view the whole list with detailed descriptions on the IRS website. 

#3 - Messy Tax Prep

Everyone makes mistakes, but mistakes on your filings could result in an audit. To avoid any suggestion of unscrupulousness, ensure that all numbers match on your documents. Don’t round up or down for any reason, verify that your spelling is accurate, and ensure your documentation is all presented in an organized fashion. These are small things, but they certainly make a difference. 

#4 - Filing a Schedule C 

Filing a Schedule C (IRS Form 1040) is certainly not illegal, but it may send a message that you are not operating as a legitimate business should. Those who are fully established as businesses often opt to file as corporations. If you’re still filing a Schedule C, it’s worth asking why and discussing options with your tax preparer.

 

While none of these 4 red flags for an IRS audit guarantee an investigation, their presence could lead to extra scrutiny, especially if your filing includes more than one. Giving your filing an extra pass to ensure you don’t raise any eyebrows could save you a great deal of time, energy, and stress in the long run. As always, we’re here for tax prep tips, tax planning services, and more. Just drop us a line.

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