There are many factors that go into an audit selection, but generally speaking, here are some of the top reasons clients may get audited:
You claimed a disproportionate charitable contribution deduction. Each year, millions of taxpayers claim the charitable contribution deduction. Even under the new tax law, many taxpayers will still be able to claim the deduction. However, your clients will run into trouble if they claimed an amount for the deduction that was too high compared to their income. The IRS has charitable deduction amounts that it deems proportionate for each income level.
You are self-employed. Your clients who are self-employed are more likely to be selected for an audit than your clients who are not self-employed. This is because Schedule C includes so many potential deductions business owners can claim.
For example, if your clients claimed excessive deductions for things like business meals, travel, entertainment, vehicles, or showing a significant net loss, the IRS will more closely scrutinize their returns. Be sure to make your clients aware of the importance of having receipts and detailed records for all business expenses they deducted.
You claim a home office deduction. The home office deduction is for those who use a space in their home “exclusively and regularly for their trade or business.” The IRS is great at finding taxpayers who claimed the deduction fraudulently. It will be difficult for your clients to prove they really did qualify for the home office deduction.
You wrote off a loss for a hobby. Your clients should have reported income for a hobby and may have qualified for some deductions, but they should not have written off a loss from a hobby. The only reason they would have been able to write off a loss is if their hobby was run like a business and they had an expectation of profit.
This is why it is so important to seek professional help.
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Iskra C. Perez Salcedo