7 Reasons for an IRS Audit
Round numbers, math errors, income concealment, and excessive deductions can all raise an alarm. An IRS audit is an inspection or review of your records to make sure you’re filing your taxes legally and accurately. To put it another way, the IRS is only verifying your figures to make sure your return is accurate.
State tax agencies occasionally conduct audits as well. You don’t need to worry if you’re telling the complete truth. An IRS audit or a state audit is not inherently evil. However, there is cause for alarm for those who are purposefully abusing the system.
Why Does the IRS Audit People?
To reduce the “tax gap,” or the difference between what the IRS receives and what it is due, the IRS performs tax audits. Even though the IRS frequently chooses individuals based on suspected activities, audits can occasionally be chosen at random.
Here are seven of the biggest warning signs that an IRS audit is imminent as you navigate the tax season.
1. Making Mistakes in Math
“Oops” won’t do when the IRS begins an investigation. Do not commit errors. Everyone who must file taxes must comply with this. Avoid writing a 3 where an 8 should be. Avoid getting sidetracked and forgetting to add the final zero.
While mistakes may occur, you should always double and triple-check your calculations when filing your taxes. Whether or not your error was deliberate, you will be subject to sanctions. If you have certain math issues, employing decent tax preparation software or a local tax professional will help you avoid costly mistakes that could result in an IRS audit.
2. Fail to Disclose Some Income and Get an IRS Audit
How can I get an IRS audit easily? Do not disclose a portion of your revenue.
Guess what, though? It won’t be long before the IRS realizes you failed to report your income because the magazine forwarded a copy of your 1099 to the IRS.
3. Making Excessive Charitable Gift Claims
You are qualified for some well-deserved deductions if you made sizable donations to charity. Common sense dictates that you shouldn’t report fraudulent donations. Don’t claim your donation if you don’t have the necessary proof to back it up. On a $40,000 salary, claiming a $10,000 charitable deduction is probably going to get some attention.
4. Submitting a Schedule C With Too Many Losses
This one is for independent contractors. If you are your employer, you might be tempted to claim personal expenses as business expenses to conceal your income.
However, take into account the suspicion that too many reported losses can arouse before you write off your brand-new ski boots. The IRS can start to question how your company is surviving. Info is available in IRS Publication 535.
5. Taking Excessive Business Deductions Is a Reason Fro a IRS Audit
In a similar vein, reporting too many expenses is equivalent to reporting too many losses. Purchases must be both necessary to your business and ordinary to qualify for a deduction. Paint and paintbrushes might likely be claimed by a professional artist. Because they satisfy both qualifications. A lawyer who paints for enjoyment but doesn’t make money off of the pieces could be in trouble. The following questions should be asked: Was the purchase typical and accepted in the industry? Was it suitable and useful for the profession or business?
6. Claiming a Deduction for a Home Office
Fraud in home office deductions is rampant. It could be alluring to give oneself ill-gotten deductions for costs that don’t count. According to the IRS, those who use a portion of their house “exclusively and frequently for your profession or company” are eligible for the home office deduction.
So long as you utilize your home office solely for work, it can count. It is unlikely that your living room qualifies as a deductible office space if you occasionally answer emails on your laptop while seated in front of your 72-inch flat-screen TV. If you have designated a certain area of your house for business use only, you may be able to justify your claim for a home office deduction. When reporting costs and measures, be truthful.
7. Choosing Well-Presented, Round Numbers
The numbers on your 1040 form and supporting documentation most likely won’t be in neat, $100 increments. Be exact and prevent guesswork when performing, but the nearest dollar. Let’s say you’re a photographer and want to write off a $495.25 lens; your computations. Not the nearest hundred round that to $495, not to $500. Even $500 is a bit improbable, and the IRS might ask for proof.