Real Estate Agent IRS Audit Triggers
As the calendar year ends, every real estate agent will look back at how the year went financially. Your income (or profit) is almost always in an inverse relationship with your tax obligations. As a real estate agent, you will want to take as many steps as possible to avoid an audit. With that in mind, here are the top audit triggers, and what you can do to avoid them.
Income Audit Triggers
- Income Numbers Don’t Match. Make sure your 1099’s match up to what you report to the IRS. This is the fastest way to get a letter from the IRS because the IRS will automatically detect a discrepancy.
- You made a lot of money this past year. This one is simple, and it is good. You want to make a lot of money as a real estate agent, that’s probably why you got in the business. However, increasing your income also increases the amount of your income the IRS could stand to gain by auditing you. If you are making a lot of money during the year, make sure you can prove everything that you are taking as a deduction.
- You made a lot less money this past year. This is not as good. If you made a lot less money, an audit could be even more devastating. If you are legitimately reporting all income, you shouldn’t have anything to worry about, but if there’s a chance you might not have reported everything (even by accident), this won’t look good in an audit.
Deduction/Employment Audit Triggers
- As A Real Estate Agent, You’re Self Employed. If you are a real estate agent, this likely applies to you. Even if you’ve set up your business as a corporation or an LLC , you will still fall into a higher risk category than someone earning a paycheck from a large company. Be extra cautious about the deductions you take, an make tax liability payments promptly.
- You deduct your home office and/or vehicle. You should! But as a real estate agent, you have to do this one right. You should get clear with your CPA on exactly how much is allowable for home office and vehicle deductions, as going over these thresholds can be a red flag that results in an audit, regardless of how much income you make. Be very careful to follow these guidelines.
- Meal/Entertainment Deductions. Yes, these deductions are allowable, but under strict guidelines. Are you spending amounts that are “excessive” or “lavish”? Are you spending amounts that are too large in proportion to your gross income? All of these things can be red flags that trigger an audit, and you will find yourself in a difficult situation trying to justify these expenses. Meals and entertainment costs are deductible up to 50 percent if they are ordinary and necessary to your business.
- You were particularly generous this year! The IRS is always on the lookout for people who inflate their charitable donations and use a range based off a percent of income that is reasonable.
Bottom line if you have questions about a deduction that you can take ask your CPA, its better to then going through an audit.
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