In attending various tax conferences that discuss this topic in detail, I have compiled the following list of "issues" that might trigger a tax audit:
- Making a lot of money or large fluctuations of income
- Making sure you are reporting all of your income, especially if you're a business. This can be a grey area if you operate a cash business reported on your Schedule C, such as a taxi service, car wash, bar, or hair salon
- Reporting high mortgage interest deductions
- Reporting large charitable donations, specifically regarding property donations
- Reporting rental losses. There are many complicated rules regarding real estate professionals vs non real estate professionals, passive loss issues, and basis
- Reporting alimony deductions if the recipient does not pick up the income
- Reporting hobby losses
- Reporting excessive business expenses, specifically meals, travel & entertainment
- Reporting foreign accounts
- Reporting 100% business use of vehicles
- Reporting day trading losses and failing to report winnings
- Claiming a home office deduction
- Reporting gains/losses from currency transactions
- Reporting NOL carryforwards and carrybacks
- Claiming a rehabilitation tax credit
- Reporting a prior year minimum tax credit carryforward
This post is not to say that you are not entitled to the above listed deductions/credits, but know that if any of these items show up on your income tax return that you are putting yourself in a position to be at a higher risk of audit. With proper substantiation, these audits can go smoothly, but without it you may have the items disallowed.