There are many reasons that the IRS initiates an audit.  See our list below for a few of the most common to avoid to keep from running afoul of the IRS.  Of course, keep accurate records and receipts to help you stand up to an audit and minimize the adjustments made if you become the target of an IRS audit.

  1. Failing to report ALL of your income – This is a very common reason for IRS to send a letter to your door. Think about what your sources of income were for the year and check to make sure you have all the tax documents for that income.  With paperless options for online accounts, many people forget to check and print their tax forms.
  2. Rounding numbers – Report numbers as they are reported on your W-2, or 1099’s. Rounding to the nearest dollar is ok, but not to the nearest hundred! Your deductions for medical, charity, interest, taxes, etc. should be the exact amount you paid or donated.
  3. Deducting unrealistic business expenses – You should have receipts and records to back up every deduction that you report to offset business income. Only expenses that are ordinary and necessary for your business may be deducted.  The IRS compares like businesses to each other and flags outliers for review.
  4. The Earned Income Credit – The IRS has really cracked down on this credit because so many people who have claimed should not have. Make sure you are following the rules and provide the documentation to your CPA when requested.
  5. Home Office Deduction – This deduction has been abused by taxpayers causing them to take inflated or unsubstantiated deductions for home office. Since Covid-19 caused many to work from home, this deduction is under even more scrutiny. Document your expenses and be able to prove you use your office space exclusively for business.
  6. Charitable Donations – Only gifts to qualified organizations are deductible. You must keep a record of all contributions.  If the contribution amount is $250 or more, you must also have a contemporaneous written acknowledgement from the charity for the amount you donated and the value of anything you received in exchange of the donation, if any. Gifts to individuals are not deductible.

Honorine M. Campisi, CPA