The Internal Revenue Service (IRS) is expecting to receive millions of tax returns during the 2022 tax season. And with budget cuts, staffing shortages, and ongoing pandemic problems, the agency doesn't have the time or resources to thoroughly examine everyone's returns. But that doesn't mean you're not in any danger of getting audited. According to Jackson Hewitt, more than 771,000 individuals were audited by the IRS in 2019. And experts warn that if you claim two specific deductions on your return, you might be opening yourself up to more scrutiny from the tax agency. Read on to find out what write-off you'll want to carefully consider.
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Taking certain deductions might put you at risk of being audited.
iStockTaxpayers are eager to claim deductions on their tax returns. Deductions reduce the amount of your taxable income, which could mean you'll owe less to the IRS—or even get more money back in your tax refund. Unfortunately, some people try to fraudulently claim deductions they aren't entitled to, which is why the IRS pays special attention to write-offs.
"Taking write-offs that are disproportionately large compared to your income tend to trigger red flags," Sarah York, an enrolled agent with the IRS and in-house tax expert for Keeper Tax, explains. According to Samantha Hawrylack, a personal finance expert and co-founder of How To Fire, over-claiming deductions you're not eligible for can lead to an audit.
The IRS is more likely to audit people who claim a home office deduction.
iStockTwo deductions in particular are more likely to catch the watchful eye of the IRS. According to Dmytro Serheeiv, a professional tax specialist and co-owner of PDFLiner, the home office deduction is one of these. "If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes," the IRS explains on its website.
Charles Corsello, an enrolled agent with the IRS and president of TaxCure LLC, confirms that he has seen "higher rates of examinations with those who claim a home office deduction." After all, there are certain requirements to claim this. According to the IRS, part of your home must be regularly and exclusively used for business, as well as be a principal place of your business for this write-off.
You also need to identify how much of your home is an office—which can raise further red flags. "The home office deduction is a good example of a business write-off that people tend to abuse, so the IRS is more likely to flag it if it seems excessive," York previously told Best Life. "For example, if you claim your office is 80 percent of your house, that’s probably too much."
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Auto expense deductions might also prompt the tax agency to conduct a closer examination.
iStockIt's not only the home office deduction you should be careful with, however. Crystal Stranger, the international tax director for GBS Tax and author of The Small Business Tax Guide, says that taking an auto expense deduction is also likely to catch the eye of the IRS. "Claiming large amounts of auto expenses is a big red flag for getting audited, especially if there is hardly any income involved," she previously told Best Life.
Claiming an auto deduction is especially suspicious since it is often used incorrectly. "Auto expenses are only deductible for amounts used for business, not for commuting or other activities," Stranger explains. "Claiming 100 percent business deduction for autos is extremely rare."
According to the IRS, you can deduct the entire cost of ownership and operation for your car only if it is used solely for business purposes. But if you use your car for both business and personal purposes, you are only allowed to deduct the cost of its business use. And you must be able to back up the expenses you report. "The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement," the IRS warns.
You should still take all the deductions you're allowed to claim.
iStockBut if you do qualify for a home office or auto expense deduction, you should still take it. Dana Ronald, a tax expert and the CEO at Tax Crisis Institute, says taxpayers can end up getting their tax refunds delayed by failing to claim all of their deductions. And the most frequently missed include job-related expenses and home office deductions, as well as student loan interest, charitable contributions, and medical expenses, she says.
"If you have the proper documentation for your deduction, loss or credit, don't be afraid to claim it," the experts at finance site Kiplinger say. "Don't ever feel like you have to pay the IRS more tax than you actually owe."
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