Five Important IRS Audit Triggers - Northern, NJ / Manhattan, NY CPA Firm
1. Taxpayers that file Schedule Cs (i.e., Self Employed and Independent Contractors) with their Form 1040, especially if they show continued years of losses.
Since Schedule C losses are deductible against other income such as wages or interest, losses in three or more consecutive years will catch the IRS's attention that these are nondeductible "hobby losses." Visit us at http://www.kgcpa.net/custom2.php to learn more about sole proprietorship (schedule c) filings.
2. Large amounts of charitable contributions, especially non-cash contributions.
If audited, a taxpayer will need to provide proof for every dollar of donation deductions, and sometimes appraisals as well for non-cash contributions. Visit us at http://www.squidoo.com/tax-benefit-for-caring-for-feral-or-stray-cats-dogs
3. Taxpayers who report themselves as a real-estate professional and continue to have losses.
The IRS could consider the real estate professional’s losses as ordinary losses and not subject to passive activity limitations.
4. Subchapter S payouts where owners have little or no compensation.
Those who take too little compensation are asking for the IRS’s attention since payouts are not subject to payroll taxes as they are with compensation.
5. Claiming large amounts of business travel and entertainment expenses.
What amount is too large depends on your industry (e.g., a lawyer’s T&E expense amount would be different than a plumber’s T&E expense).
Ken Gibbons | 01/19/2012