Every year millions of tax returns are audited by the IRS. The average taxpayer main concern behind paying taxes is somehow causing the IRS to audit their tax returns. It’s true that certain things can automatically trigger an audit. An audit doesn’t actually mean your return is wrong. There are items on a return that present higher opportunities for committing fraud or mistakes.
The burden of proof for taking credits and deductions falls on your shoulders. You might have to prove that you are taking a position on your return in line with current tax code.
The audits are done primarily by mail today. There is a small chance of having an auditor show up in person. No matter how your audit is done you need to respond as soon as possible to ensure they don’t give you a default position. Letter normally state you have a certain amount of days from receiving the letter to respond if you disagree. If you don’t respond they automatically assume you agree with their findings in the letter. If you respond there are one of three things that happens.
The IRS auditors decides the information provided is correct and your return stays the same.
The IRS auditor proposes a change to your tax return, and you can agree to it and/or pay the appropriate taxes, interest or a penalty.
The IRS proposes a change you don’t agree. You have a chance to appeal and enter into an agreement with the IRS.
In the cases of serious tax fraud even though it’s an extremely rare outcome. The IRS can pursue forfeiture of property, jail time, and restitution.
1. Reporting the wrong taxable income
The IRS actually receives your W-2,1099, and K-1’s before the taxpayers. This goes for both full-time employees and self-employed contractors.
You should check to see if your W-2 or 1099 you receive from any company matches your own records. If you think it is incorrect, immediately inform the company, and request that they file a corrected W-2 or 1099 with the IRS. If a company fails to update their information you would have to file a complaint with the IRS to go through this process of updating those records.
2. Charity donations
If you’re giving away large amounts of money to a charity when your income is low. Be prepared for some scrutiny from your tax pro and the IRS. If you are audited and can’t substantiate your donations. You and the tax pro will have fines and penalties to pay. Any large donation should be appraised, and you should file the Form 8283 for any donation over $500. Make sure you keep all of your charity receipts and follow the IRS’s tips for charitable donations.
3. Business Vehicles
Cars/ SUVs are still the main transportation for alot of business owners. Having a vehicles under your business doesn’t exclude you keeping track of personal miles. Running personal errands to pick up friends and go shopping should not be included. You should always keep a record of your mileage using qualified record keeping guidelines.
4. Home office
This deduction is on a lot of peoples deduction list. Who wouldn’t want to be able to take electricity, internet, and other expenses you use at home and get a benefit. There is a specific definition of what qualifies as a home office, so claiming it could easily trigger an audit. Ensure the room is where you do the majority of your work, and that is not used for any other purpose, especially personal use. This type of deduction can trigger an in-person audit where the IRS want to actually see the room you are claiming for a business deduction.
5. Tax Errors
Simple tax mistakes like small mathematical mistakes are the top reason for alot of audits. The IRS will normally fix these and send you a correction. This can also result in you actually receiving a larger refund as well.
6. Round numbers
On indication of making up income and expenses is have a series of even or round numbers. This is a common practice for people who don’t keep records and try to prepare a return from memory. Audits don’t always happen immediately. They normally come a few years later. You should have documentation to support your deductions and credits. When preparing you return use the actual numbers that match your receipts and other records.
7. Business Losses
The main requirement for being considered to have a business by the IRS is actually doing something to earn a profit. If your business just constantly loses money year after year it will cause some red flags. If you report a loss three out of the last five years. The IRS might consider your business a hobby or fraudulent depending on your specific circumstances. If you have a business ensure your run it like one with receipts and backup.