7 Reasons You May be Targeted for a Tax Audit
An IRS audit is a thorough study or review of taxpayer records and accounts to ensure that you’re properly reporting your income and complying with tax rules. In other words, the IRS is merely double-checking your data to ensure that your return is free of errors.
State tax agencies may also conduct tax audits. You don’t have to be concerned if you’re telling the complete truth on your return and not trying to hide anything. An IRS or state tax audit process has nothing intrinsically evil about it. People who are willfully cheating the system, on the other hand, should be concerned.
What triggers an IRS tax audit?
A tax audit is conducted by the IRS in order to close the “tax gap,” or the difference between what the IRS is owed and what it actually receives. An audit can happen at any moment, in any year, although the IRS frequently chooses people based on suspected activities.
Lying on your income tax returns is not acceptable to us. However, we oppose paying more taxes than you owe. Here are seven of the greatest red flags that will likely place you in the IRS audit hot seat in front of an auditor as you walk the line and prepare your documents for this tax season.
1. Making mistakes in your math
“Oops” isn’t going to cut it when the IRS starts looking into your situation. Make sure you don’t make any mistakes by double checking your work and numbers. This is true for anybody who has to file a tax return. Make sure you don’t type a 3 instead of an 8, and check that your numbers match the forms you receive.
Don’t get sidetracked, and stay focused. Don’t get carried away and forget to add the final zero. If you’re doing your taxes yourself, make sure you double- and triple-check your numbers. Regardless of whether your mistake was deliberate or not, you will be fined. If your arithmetic skills are a little wobbly, using decent tax preparation software or hiring a local tax preparer will help you avoid costly mistakes that could result in an IRS audit.
2. Failure to report part of your income
Is there a simple way to have the IRS choose to audit you? Don’t report a portion of your earnings.
Let’s imagine you work for a fencing company and you make a little extra money writing articles for a fencing newspaper on the side. You could be tempted to submit only your main job’s W-2 form and keep the freelance writing revenue on your Form 1099 hidden.
Nonwage income from things like freelancing, stock dividends, and interest is reported on a 1099. The 1099-MISC is a sort of 1099 that is used to report amounts paid to independent contractors. Because the publication sends the IRS a copy of the income mentioned on your 1099, it’s just a matter of time until the IRS finds out that you didn’t report everything.
3. Having too many donations to charity
If you made considerable charitable gifts, you may be entitled for some well-deserved tax breaks. This piece of advice is self-evident: don’t report fictitious donations, and don’t claim more than fair market value. The IRS has a form that covers the fair market value of charitable donations. Don’t claim your contribution if you don’t have the right evidence or income levels to back it up. It’s quite straightforward. On a $40,000 salary, claiming $10,000 in charitable deductions is certain to raise some eyebrows.
4. Too many expenses on a Schedule C
This is for people who work for themselves and file a Schedule C. If you’re self-employed, you might be tempted to disguise your earnings by claiming personal expenses as business expenses. But, before you write off your new ski boots, think about the suspicion that too many reported losses can generate. The IRS could start to worry how your company manages to stay solvent. Details can be found in IRS Publication 535.
5. Claiming too many business tax deductions
Reporting too many expenses has the same effect as reporting too many losses. Purchases must be 1) ordinary and 2) required for your business to qualify for a deduction. Paint and paintbrushes are likely to be claimed by a professional artist because they fit both conditions. A lawyer who paints for pleasure and does not benefit from his work may have a problem. The following are some questions to consider:
- Was the purchase common and accepted in the trade or industry?
- Was it beneficial and relevant to the trade or business?
6. Claiming a home office deduction
Fraudulent deductions for home offices abound. It’s tempting to take advantage of unjustified deductions for expenses that don’t strictly qualify. The home office deduction is only available to persons who use a portion of their house “exclusively and routinely for your business or company,” according to the IRS. That means a home office can qualify if it is solely used for work.
Your living room is unlikely to qualify as a deductible office space if you occasionally answer emails on your laptop in front of your 72-inch flat screen TV. If you have set aside a portion of your house solely for work purposes, you may be able to claim the tax benefits of a home office deduction. When reporting expenses for itemized deductions, be truthful.
7. Using unrealistically rounded numbers
The numbers you put on your 1040 tax form and the supporting paperwork are unlikely to be in simple $100 increments. Make sure your calculations are accurate and that you don’t make any guesses. Not to the next hundredth, but to the nearest dollar. Assume you’re a photographer with a $495 claim. If you’re paying for 25 lenses as a company expense, round up to $495, not $500. Even a $500 payment is improbable, and the IRS may demand verification.
Take advantage of all legitimate expenses
The bottom line is that you should take advantage of every legitimate tax deduction you are entitled to, while also being completely honest. Most people aren’t aware of all the deductions they can take, so it is worth having an accountant or tax professional prepare your tax return or look it over before you file it.