IRS Audit for Limits on Itemized Deductions

By: Steve Lander

Writing off too many charitable gifts can lead to an audit.

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When the Internal Revenue Service finds a discrepancy or other potential error on your tax return, it can audit you. Since many itemized deductions are either tied to hard limits or to complicated rules as to how they should be calculated, they can be major audit triggers. While the deductions for home mortgage interest and charitable contributions are specifically limited, every deduction can be subject to general limits or to IRS scrutiny.

Mortgage Interest

You can't deduct all of your mortgage interest. The IRS lets you write off interest only on your first and second homes. Your total interest deduction is also capped. You can write off the interest only on your first $1.1 million of debt -- $1 million of debt to buy, build or improve your home and $100,000 of additional debt you took out for any reason, such as a home equity line of credit. If your write-off is outside these limits, you may be audited.

Charitable Contributions

While the IRS lets you write off charitable contributions, it applies many limits to the deductions you can claim. Even if you're feeling generous, you can't deduct donations that total more than half your adjusted gross income. In addition, the larger your donation, the more documentation you will need. For example, if you donate an item worth over $5,000, the IRS will require you to have a professional appraisal to substantiate its value and your deduction for it. The more deductions you make, especially when they are not made in easily valued commodities like cash and stocks, the higher your risk of audit will be.

The DIF Score

The IRS also limits your itemized deductions without telling you about it and uses those limits to decide whether to audit you. When it receives your tax return, the IRS runs it through the Discriminant Inventory Function System to calculate its DIF score. If you have a high DIF score, your audit risk goes up. Many factors contribute to your DIF score, including certain types of itemized deductions as well as claiming too many deductions relative to other people with similar incomes.

The Audit

If you get selected for an audit, start collecting your supporting paperwork. If your itemized deductions are legitimate and you can substantiate them, you should do fine. If they aren't and you wrote off more than the IRS' limits, you will have to pay the tax plus penalties and interest. One way to make your audit pay off is to bring documentation for additional deductions that you neglected to claim when you originally filed your return. As long as they're under the IRS' limitations, you may be able to add them in at your audit and walk away with the IRS owing you money instead of the other way around.


About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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