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December 7, 2021

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Gauging your risk of a tax audit

The average taxpayer is generally at low risk of getting audited by the IRS, but certain actions and circumstances can increase your chances of having to undergo one. According to an article by NerdWallet, some reasons that may make the IRS more likely to audit you include:

Claiming too many business deductions

Before claiming a business deduction, consider if the IRS will view the expense as legitimate. A carpenter may claim a table saw as a business expense, but an architect using the saw to build a work table is on the sketchier ground. Legitimate business expenses must be ordinary and accepted as necessary in a given occupation.

Overreporting charitable donations

Another red flag that may trigger a tax audit is a large amount of charitable donations. Such donations can result in significant tax savings, so the IRS is naturally interested in determining if they are legitimate. If you make and report charitable donations, enjoy the tax savings, but make sure you have the receipts to back them up.

Wrongly reporting your home office as a deduction

The IRS maintains a fairly narrow definition of a home office. You must use your home or part of your home exclusively for business purposes to enjoy the benefits of this deduction. Unless you are self-employed, a gig worker, or an independent contractor, you do not likely qualify for such a deduction. In September of 2020, the IRS offered the following clarification on this issue: “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.”

Using too many round numbers

Income and expenses do not generally come out to nice round numbers. You can round to the nearest dollar, but not the nearest ten or hundred dollars. Too many zeros in your tax forms may draw the scrutiny of the IRS and state collection authorities.

Audits