High-Risk Audit Areas; Unreported Taxable Income and Self-Employment

Remember that any taxable income is reported to the IRS. From banks reporting taxable interest income, to employers supplying their copies of W-2’s, all information is entered into the IRS computer system. When you file your return, you social security number is entered into the IRS computer system, checking against what others have reported. If information comes back that you have not reported on your filing, this is an immediate red flag. Always report all income; failure to do so automatically places you in the high-risk area. The bottom line is that those 1099’s that you receive from investments, banks and other entities are just as important as any other tax document you receive.

If you are self-employed, you have a greater flexibility to cheat on your taxes by way of not reporting taxable income and inflating your deductions. The IRS knows this and has found that self-employed individuals are more likely to cheat on their taxes then a salaried employee. If you are working full time, and you receive a W-2, chances are that you are not going to change the W-2 and that you don’t have time to earn other income. With that said, the self-employed are high risk and are carefully monitored by the IRS. Additionally, others that receive a 1099 such as waitresses, cab drivers, and even house cleaners are held in the same respect because they typically receive cash payments. The IRS does look at a self-employed individual’s income and determine if the reported income can support their lifestyle. IRS manuals are available to the public and teach auditors about 100 of the most popular self-employment industries and what to look for within each industry.

While there are legitimate reasons to claim a home office deduction, it may not work to your benefit. Since the rules about claiming a home office deduction are complicated, a CPA should be used to see if you qualify. If you do qualify, it may not be worth the small tax savings that you may be entitled because this move puts you in the direct view of an IRS audit. People who claim a home office deduction are considered high risk. Since tax laws are so complicated, an audit may result in more money being spent in penalties than a home office deduction could save you for years. If you are absolutely entitled to this deduction, you have consulted a CPA, and it would result in significant tax savings then take the deduction. Just consider the fact that you will be placed in high-risk status before making that move.