Avoid these 4 red flags that could trigger an IRS audit this tax season

• Filing your taxes wrong can lead to an IRS audit, penalties, and other complications.
• A tax attorney shared 4 of the most common IRS audit triggers he’s seen.
• Keeping extensive records can go a long way in preventing tax mistakes, he said.

Taxes are already complicated, and filing them incorrectly can make things even worse, as mistakes can result in a letter from the IRS and potential penalties.

Some areas on your tax filings are more prone to mistakes than others, according to Stephen Weisberg, principal attorney and founder of The W Tax Group.

The IRS will often automatically correct small errors and typos, and an IRS audit isn’t a very common occurrence. However, glaring errors will raise eyebrows and result in an audit.

Luckily, a little bit of extra precaution can go a long way in preventing an IRS letter. Below, Weisberg shared the top 4 mistakes that could trigger an IRS audit and how to avoid them.

Missing income

One of the most common reasons for an IRS audit is also one of the most straightforward — forgetting to report income.

The IRS receives copies of all of your income documents, so it can corroborate with your documentation when you file taxes.

Weisberg sees this issue come up frequently with 1099 forms, which often don’t come from your direct employer: “When it comes to 1099s, money made on stocks or interest can be forgotten pretty easily,” Weisberg said.

If your reported income doesn’t match what the IRS has on file, it can trigger an automatic audit, Weisberg added.

It’s easy to avoid this mistake by keeping track of your records. If you have multiple streams of income, double-check that you received a tax form for each. Waiting until you have all of your forms before filing your taxes can also be a good idea. The deadline for employers and other income payers to send you your income forms is usually January 31. And if you don’t receive a W-2 or 1099 that you’re expecting, follow up with your employer.

Exaggerating business expenses and underreporting income

Being a small-business owner also comes with increased tax compilations. Business owners, including solopreneurs, report their business profits and losses on Schedule C on Form 1040.

“If you have large business expenses or losses on your business, the IRS starts thinking that you might be taking personal expenses as losses on your business, or you might be exaggerating the deductions you’re taking,” Weisberg said.

It’s not uncommon for small businesses to experience losses, but if your business is posting multiple years of losses in a row, the IRS might begin to question its legitimacy.

Businesses that have a high volume of cash transactions are also at an increased risk of being audited, as the IRS could look to investigate underreported income. Examples include barber shops, restaurants, and beauty salons. In that case, it’s a good idea to verify your income and transactions on a regular basis.

Home office deductions

Small-business owners may be able to claim home office tax deductions if they work from home. However, this deduction can come with complications.

“Especially with today’s remote working situation, the home office deduction also creates a lot of issues for audit purposes,” Weisberg said.

You can only claim your home office as a tax deduction if it’s used for self-employment business matters — not if you used it for your W-2 job.

“It’s got to be used exclusively for business, and so you have to meet certain guidelines, and you have to keep a proper record. Any inconsistencies in that matter can trigger an audit, and the IRS looks at that home office deduction a lot,” Weisberg told BI.

There are two ways of calculating the home office deduction. The simplified method stipulates that you can expense $5 per square foot of your home office for a maximum of $1,500. If you follow this method, there’s no need to track individual expenses.

The direct method involves deducting a percentage of home expenses like rent, mortgage, internet, and other utilities, calculated by dividing the square footage of your home office by total home space. This method can result in a larger tax deduction but requires detailed recordkeeping, so Weisberg recommends extra caution if you choose to use it.

Car expenses

Small-business owners can also claim tax deductions for vehicle expenses. But if you also use the vehicle for personal purposes, mixing the two could lead to IRS scrutiny, Weisberg warned.

You can calculate your expenses based on total miles driven, or individually deduct certain business expenses. If your car is for both personal and business use, you can add up your car-related expenses and multiply by the percentage of miles driven for business.

Weisberg has seen people get in trouble with the IRS for overstating how much they’re driving for business purposes.

“If it doesn’t seem reasonable for how much your business is making or for what kind of business you have, the IRS is going to look at it,” Weisberg said.

If you claim this deduction, make sure to keep a detailed log each time you use your vehicle for business purposes, including mileage, date, and start and end addresses.