Sam Brotman, JD, LLM, MBA September 29, 2013 6 min read

IRS Audit Red Flags – Part Five – Schedule A and E

Continued from IRS Audit Red Flags – Part Four – Cash

Charitable contributions

Inflated charitable contributions are one of the most abused tax deductions and, as such, one of the biggest red flags that a return is deserving of an audit. In addition, many taxpayers fail to include the required schedule for non-cash contributions to charities, which is indicative of either a false deduction or the fact that the taxpayer lacks the proper substantiation requirements under the Internal Revenue Code (resulting in a disallowed deduction). In any event, the IRS often challenges non-cash charitable contributions because there is at least some potential for change and resulting in additional revenue for the IRS.

Medical expenses

This is not a huge red flag for everyone. As you get older in age, the IRS likely becomes more tolerant of medical expense deductions and, therefore, would be less likely to select you for examination based on this category alone. However, medical expenses are frequently abused by some in the form or another by taxpayers trying to write off cosmetic and other aesthetic procedures as legitimate medical expense. In addition, medical travel has been a huge potential area for abuse as some taxpayers game the system to try and absorb some of their personal travel costs. One of the biggest telltale signals of potential abuse is when medical expenses (or Schedule A expenses in general) rise as income rises or there is significant medical expense for someone who is younger and does not have a history of high medical expense deductions. Again, many taxpayers are entitled to and legitimately have high medical expenses. However, like most other Schedule A deductions, there is often great potential for abuse.

Losses from rental property/complex rental income and expenses

Rental property has been a particular subject for abuse in recent years with the dramatic changes in the housing market. As such, many people have been unscrupulously padding losses into their investment properties to help offset income from other sources. This happens frequently with those who have portfolios with multiple properties and who may be unfairly using losses to offset large gains. In some cases, these losses can be fairly substantial and result in a significant tax loss to the government. Rental property losses in the first year or even the first few years will not necessarily trigger an audit, particularly because of the illiquidity in the housing marketing, but sustained losses draws scrutiny from the IRS. Think of it this way: Why would someone continue to dump money into a losing investment year after year for a purpose other than to generate a tax loss (i.e. no significant business reason)? Also, abnormal losses for a certain year may also raise a red flag particularly with frequently abused/misreported expense categories such as repairs and maintenance (the IRS will audit you for capital expenditure treatment).

Continue to IRS Audit Red Flags – Part Six – Employee Audit Red Flags

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Article Index

IRS Audit Red Flags – Part One – Why IRS Audits Occur

IRS Audit Red Flags – Part Two – Common Errors

IRS Audit Red Flags – Part Three – Frequent IRS Targets

IRS Audit Red Flags – Part Four – Cash

IRS Audit Red Flags – Part Five – Schedule A and E

IRS Audit Red Flags – Part Six – Employee Audit Red Flags

IRS Audit Red Flags – Part Seven – Schedule C Expenses

IRS Audit Red Flags – Part Eight – Schedule C Losses and Schedule B and D

IRS Audit Red Flags – Part Nine – Margins

IRS Audit Red Flags – Part Ten – The Self Employed/Conclusion

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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