“IRS audit” is one of most-feared phrases in the English language. While the chance of being audited is pretty low (about one in 100), the chance of being touched by the IRS is on the rise in recent years. You may be one of the unlucky two percent of taxpayers who are subjected to random audits, but most IRS inquiries arise for specific reasons. Here are the 12 audit flags for 2012. Remember, many of these are legitimate — just make sure that you have all supporting documentation in case the IRS calls.

1. You Make Stupid Mistakes
   Information has to be entered on to a tax return one way or another. If you choose to do your taxes by hand, math errors could be very costly for you in the long run if you get audited. You should consider using a tax program or a professional to avoid making addition, subtraction, multiplication, or division errors. Sometimes, you may miss filling in certain boxes which can be another trigger for the IRS.
   
   
2. You Have a Big Mouth
   You should never brag to anyone privately or publicly that you pulled a fast one on the IRS. Especially with the proliferation of sites like Facebook and Twitter, the IRS has become much more intelligent in watching these sites for people who don’t report income or try to fraud the government. Whistleblowers can earn some significant rewards by turning in cheats, so be very careful about who you share your tax strategies with.
   
   
3. You Didn’t File Your Taxes or Report some of your income
   Needless to say, you should file your taxes every year. The IRS has all your W2s, 1099s, K1s, etc, so if you don’t file your taxes, it raises questions and cause the IRS to come and knock you your doors and When you don’t file your taxes, you could leave yourself to unwanted penalties and interest. If you don’t file for multiple years, you could put yourself in a position to serve jail time as well.
   
   
4. You Have an Unincorporated Business
   Anytime you get 1099 income during the course of the year, you are in a sense a de facto corporation as a sole proprietor (Schedule C Sole Proprietor). A business that continues to lose money year after year may be considered a hobby, especially if you don’t turn a profit over three of the last five years. If the IRS audits you, they could potentially disallow the deductions.
   
   
5. You Guess on Investment Cost Basis
   No matter what investment company has your money, keeping track of your cost basis is something that you always want to keep an eye on when you do your taxes. Especially for those of you who inherited individual stock from your parents or grandparents and may have inherited the cost basis. While most of the large brokerage firms do a good job of keeping track of cost basis, many of the direct reinvestment dividend plans don’t, which may make it a nightmare to do your taxes. Don’t every try to guess on this as the onus will be on you to prove you’re accuracy.
   
   
6. Taking higher-than-average deductions
   If deductions on your return are disproportionately large compared with your income, your return may get flagged. To defend yourself, make sure you have documentation.
   
   
7. Large charitable contributions
   I know that you’d like to have Mitt Romney’s tax return, but claiming big contributions like Mitt will flag your return. Again, documentation will save you and don’t forget to file form 8283 for donations over $500.
8. Claiming rental losses
   With the real estate market as it is, many homeowners are turning into reluctant landlords. Before you start claiming rental losses, you’ll need to check out IRS passive loss rules and the two major exceptions for people who make less than $150,000 and real estate professionals.
   
   
9. A home office deduction
   Are you sitting in your kitchen, checking your work e-mail? Well, that’s not a home office, according to the IRS. To qualify for this widely abused deduction, the room must be for work-only. If you really do maintain a home office, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs.
   
   
10. Large business meal and entertainment deductions
    Wouldn’t it be nice to live in a “Mad Men” kind of world, where every meal and trip could be easily classified as a tax deduction? Before you channel your inner Don Draper, remember that big deductions for meals, travel and entertainment are big-time audit flags. Keep detailed records that document the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting.
    
    
11. 100% business use of a vehicle
    Claiming 100% business use of an automobile is not just a red flag, it’s a red flag on steroids, because very few people use a car exclusively for business. No matter what percentage you’re deducting, keep detailed mileage logs and precise calendar entries for the purpose of every road trip.
    
    
12. You Have a Sketchy Accountant
    Hopefully you have selected an accountant or accounting firm that is above board. If your accountant promises you a quick refund before your tax return is even completed, that may give you cause to run for the door. Make sure you are not taking illegal deductions and check everything twice as you will be responsible for penalties and interest if it isn’t done right.

As a businessman or woman, you need advice and guidance from an accountant or preferably a CPA. and not a tax preparer who just went for H&R Block training program.

Please call Ashong & Associates, LLC at 215-941-7349 and reduce or eliminate these red flags in your life. Being a Certified Public Accountant, we qualify to represent you before the IRS.

We will be there for you when audited.

Written by Albert Ashong, CPA, ACCA, September 26, 2012