Hello Taxpayers! Tax Attorney Dan Urban here. I help people with federal and state audits.
Let’s talk about the top 3 most audited items on a federal tax return.
#3 Travel Expense
IRS loves to ask for substantiation on travel expenses, especially when the expense is large compared to your income. To deduct travel, in general, you have to be self-employed, there has to be a business purpose for the travel, it cannot be lavish or extravagant, you cannot deduct travel expenses for your spouse or family if you bring them along , and for a mix business and personal trip you cannot deduct the personal portion of the trip. Travel expenses also fall under the stricter substantiation requirements of §274(d), so you have to have records to back up the expenses or your risk losing them on audit.
#2 Vehicle Expense
IRS knows that many taxpayers use vehicles for both business and personal uses or deduct more than they are entitled, so vehicle expense are a very commonly audited item. Again you have to be self employed, you have to keep track of business vs personal miles, and you can either take a standard mileage rate or actual expenses. Vehicle expenses, like travel, fall under the stricter §274(d) substantiation requirements, so you need contemporaneous records to prevent the IRS from disallowing your deduction.
#1 Income
Of course the IRS is going to look at all of your income documents like 1099-K, 1099-DA, 1099-NECT, and make sure you reported at least as much the income documents report. But they are ALSO going to look at your bank statements 100% of the time. They will ask for them. If you don’t hand them over they will use their summons power to force the bank to hand them over. They will then sum up every deposit into the account, and all of them will be considered income unless you can prove it’s a loan, gift, or some other non-taxable item. And they will also look for transfers between accounts and cancelled checks to make sure they have eyes on all of your accounts. And nothing changes the overall tax due more than increases in income.
If you are the subject of an IRS audit and would like some help, contact me and my team for a consultation. I’m tax attorney Dan Urban. And we look forward to hearing from you.