Tax Audit Red Flags: What is a Real Risk and What is a Myth?

This article looks at four tax return “red flags” that supposedly trigger audits and whether they actually do.

Whenever tax season rolls around, articles quickly pop up on social media and on online news sites about how tax filers could inadvertently increase their risk of an audit. While some of this advice is true, much of it is myth and based on conjecture and best guesses. The fact of the matter is that the IRS does not reveal what it considers a "red flag" in a tax return. Rather, analysts can only use their best judgment in trying to work out who is most likely to be audited come tax time. With that in mind, here's a look at items on tax returns that are often referred to as "red flags" and whether they are likely to actually increase one's risk of an audit.

The Home Office Deduction

Those who work from home have a right to claim a deduction on the portion of their property that they use for business purposes. However, far too many people skip claiming this deduction, or claim less than they can, due to a persistent fear that simply claiming the home office deduction will trigger an audit. According to CBS News, however, this fear is completely unjustified with one CPA noting, "I don't believe that the home office deduction gives rise to an audit any more than anything else does."

Being Too Charitable

Another fear that many tax filers have is that a dramatic increase in one's donations to charity will trigger an audit. This "red flag" actually does have some truth to it. The issue is not so much with greatly increasing one's charitable donations, but rather with giving more than what should be possible. As MarketWatch points out, claiming charitable contribution deductions that seem suspiciously high for one's tax bracket could trigger an audit.

Extensions Trigger Audits

Just about everybody has the right to apply for an extension on their tax-filing deadline (though not for an extension to their payment deadline). Unfortunately, many people don't take advantage of this extension because they think it will catch the attention of an IRS auditor. The extension exists to help taxpayers get their tax returns in order, not as a "trap" to catch those who need to be audited. Instead of rushing to file one's tax return by the April 15 deadline, filers should feel free to apply for the extension without worrying about triggering an audit.

Early Retirement Withdrawals

As MarketWatch reports, the IRS is notified whenever somebody makes an early withdrawal from a retirement account. Unless the tax filer enjoys an exception, such as needing the early withdrawal for emergency medical expenses or for buying a first home, then that early withdrawal is subject to a 10 percent penalty. While it is hard to determine how often the IRS audits those who do not declare the withdrawal when they're supposed to, the fact that the IRS knows that such withdrawals were made means that not declaring them could be risky.

Dealing With the IRS

Getting audited by the IRS is never fun, and it could lead to serious fines and back taxes being owed. That's why anybody involved in an audit or dispute with the IRS should talk to a qualified tax attorney as soon as possible. An attorney can negotiate with the IRS on a client's behalf, thus helping advocate for that client's rights and best interests.