/Beware: The IRS Will Spot These 3 Red Flags

Beware: The IRS Will Spot These 3 Red Flags

Be careful: Even the simplest mistake can spur an audit from the Internal Revenue Service (IRS).

Fortunately, audits are way down, as TurboTax and other tax filing tools simplify the process. In 2017, the IRS only audited one percent of tax returns.

But you should still file carefully. The IRS will be on the lookout for these three red flags:

  • Unrealistic charitable deductions. Philanthropy is a noble pursuit, but don’t pursue it to save an inordinate amount of money on your tax return. Keep tabs on all of your charitable donations, and don’t exaggerate your generosity. If you earn $100,000 in income and claim $50,000 in charitable deductions, the IRS will grow suspicious.
  • Premature retirement withdrawals. If you’re using a portion of your retirement money for a down payment on a first-time home or emergency medical costs, that’s one thing. If you’re pulling out money for a luxury sedan, that’s another one entirely—and the IRS will penalize you. The IRS charges a 10 percent penalty (on top of existing withdrawal taxes) if you withdraw money for unnecessary purchases.
  • Hefty business expenses. Running a business can be expensive, but not everything is a business expense. First and foremost, your business expenses should not exceed total revenue. If your business earns $200,000 in income, the IRS will question $300,000 in expenses. And don’t expense late-night Ubers, bar food, and drinks!