No one would like to get a letter from the IRS stating that they are being audited. It can be a stressful, and at times, a time-consuming and costly process. Despite the recent statements from the IRS that it would reduce audits of individuals with income below $400,000 per year, you may still come under scrutiny based on some warning signs.
Even as a regular taxpayer, you may find yourself being audited especially if your tax return has some of the common errors or inconsistencies. In this article, we will discuss the reasons for an IRS audit, how to avoid it and how you can ensure that you do not fall foul of the tax laws.
Common reasons the IRS may audit you
Discrepancies in reported income
Among the most frequent causes of an audit is the conflict between the reported and actual revenue. The IRS gets copies of W-2s and 1099s so any income that you declare on your return but is not reported to the IRS by your employer or client is a clear indication of fraud. This can happen if you fail to report income from a sideline, a freelance job, or any investment income. It only takes a slight variation for an audit to be carried out.
Large charitable deductions
Donating money to charities can help lower your taxable income, but if you give away a lot more than you earn, the IRS may become suspicious. The IRS works with averages to know what is expected of an individual with your income level, and therefore, claiming very high deductions may be suspicious.
High business expenses or losses
If you are a solopreneur or own a small business, trying to claim many expenses or filing losses year after year may attract the attention of the IRS. They may wish to check that your expenses are indeed business-related, for instance, if you are claiming for travel, food, or entertainment expenses.
Claiming a home office deduction
This is one of the most popular ways for the self-employed to reduce their taxable income and is also one of the most audited by the IRS. If you claim a home office deduction that is grossly high compared to your business operations, then you may be a candidate for an audit.
Unreported foreign assets or income
If you have foreign accounts, investments, or other assets, you have to declare them to the IRS. If a company does not do that, it faces an audit and possible severe fines. It is dangerous to try to hide money from the IRS because the IRS has signed agreements with many other countries to exchange information about financial accounts.
Rounding numbers or estimating expenses
Applying round figures at different places in the tax return may also raise the eyebrow of the Internal Revenue Service. Rounding off the numbers is not very advisable because most of the expenses do not end with zero.
How to reduce the risk of an IRS audit
While there’s no surefire way to avoid an audit, taking these precautions can help reduce your chances of being selected:
- File your taxes on time: Late filings can draw unwanted attention from the IRS. Ensure to file your tax return before the set time or if you are unable to do so seek to file an extension.
- Report all income: Be sure to report all sources of income regardless of their size. This is to ensure that there are no inconsistencies that may lead to an audit.
- Keep detailed records: Keep copies of receipts, bank statements, and any other proof that you have evidence for your deductions and claims. In this way, you will have something to show if the IRS comes knocking, asking for proof.
- Be honest: Do not overstate losses or understate gross income. It may be tempting to lie, but if one gets caught, there is always a price to pay.
- Consider professional help: If you have a complicated tax case, a certified tax professional will be of great assistance in steering you through the various pitfalls and ensuring that you get it right when filing your tax return.
What to do if you’re selected for an audit
When you receive an audit notice from IRS it doesn’t have to be because you have done something wrong. It is basically a query for further details. Here’s how to handle it:
- Respond promptly: The IRS will issue further guidance on how to proceed. Make sure you adhere to them strictly and ensure that you fulfill any given time limits.
- Gather your documentation: Make sure that you gather all the documents that pertain to the items in question, be they receipts, bank statements, or tax documents.
- Consider professional assistance: If you are unsure of how best to proceed with the audit, you might want to consult with your tax preparer or an accountant.
Understanding why the IRS might audit your tax return can help you avoid common mistakes and reduce the risk of being flagged. Whether it’s reporting all your income accurately, keeping detailed records of deductions, or avoiding math errors, taking proactive steps can make your tax return less likely to draw unwanted attention.
