The IRS’s computer finds items on your 1040 that don’t fit. If you make $30,000 a year and take a $20,000 mortgage-interest deduction, it will set off alarms. So will other above-average writeoffs. Here’s a good barometer: a $35,000 wage earner took $2,847 in medical expenses and $5,347 in interest in 1993.
If you report that your business keeps losing money, don’t buy a fancy house or build your stock portfolio. The IRS is training its ranks to spot signs of income hiding, such as returns reporting low earnings but growing interest and dividends. They will be handed off to auditors who can review loan applications, auto purchases and more.
“File the good old Schedule C” for sole proprietors “and you are automatically one step closer to getting audited,” says tax preparer Neil Rothfeder. In 1993 the IRS checked 1 of every 37 Schedule C’s, compared with 1 of every 125 other returns. Sole proprietors who grossed more than $100,000 fared worse: roughly 1 in 25 went under the scope.
The most famous red flag was painted scarlet by the Supreme Court in 1993 when it narrowed the field of eligible taxpayers to those who actually conduct their moneymaking activity at home. Now the IRS can hound home-office holders to make sure they qualify under the new, tighter rules. Home offices used only for appointment making and record keeping won’t make the grade.
Only 50 percent of business meals and entertainment are deductible for 1994. If salespeople spend more than half their gross income on food and fun, the IRS may provide a doozy of a hangover.
The IRS is better at matching 1099 forms reporting interest, dividends and freelance fees with the people who receive them. If your form shows less income than the total of your 1099s, beware.
How much can you give before the IRS gets suspicious? The average middle-income charitable write-off is about 3.5 percent of adjusted gross income. Higher claims look bad. The 1994 returns must be backed up with statements from your charity for each payment over $250.
Of course, you may avoid every one of these red flags and still lose. Starting in October, the IRS will pluck 153,000 taxpayers at random for “superaudits” under its taxpayer-compliance-measurements program. Agents inspect every figure on every form just to learn more about the tax-filing process. These dreaded audits last descended on some 55,000 taxpayers in 1988, and subjects still report nightmares. If you regularly win lotteries, watch out.
