It’s never a good day for an Internal Revenue Service (IRS) audit, and it’s normal to feel nervous if a letter arrives from the IRS. However, there are two important things to know if you have audits on your mind. The first is that you do have options to help you avoid fines and penalties if you are audited. The second is that you may be able to avoid an audit in the first place if you know about the common IRS audit triggers.
What Is an IRS Audit?
An IRS audit is a review or examination of the accounts and financial information of an individual or organization that is conducted to ensure that all reported tax information is correct. The first step the IRS takes is to ask for additional information or clarification regarding an item on a tax return. What happens next depends on what sparked your audit, the type of documentation you provide, and the determination that’s made by the IRS agent assigned to your case.
Why You Need to Be on the Lookout for Common Audit Triggers
The big thing to know is that the IRS doesn’t select the tax returns that are to be audited by hand. Additionally, only a very small number of tax returns are actually chosen for audits at random. The IRS relies on a computer system to highlight returns that contain errors or suspicious numbers, or otherwise raise questions. The bottom line is that you aren’t going to be able to outsmart a computer system. This is why knowing exactly what will cause the IRS’s computer system to single out your return is so important.
The Nine Common IRS Audit Triggers
The good news is that you’ll probably be in the clear if you make less than $200,000 annually. In fact, less than one percent of all IRS audits are done on returns that claim incomes of less than $200,000. Of course, that doesn’t mean that you’ll totally avoid the radar of the IRS if you don’t have a huge income. Keep reading to learn about the nine notorious audit triggers.
Unfortunately, making a simple math mistake can get the IRS on your back. The IRS uses programs that review math calculations on tax returns, and any numbers that don’t quite add up the way they should can be flagged for review. Even something as simple as a Social Security number that’s off by a digit can trigger an audit. Take your time, be precise with your math, and have someone else check your numbers before you submit your return.
Does it seem like all of the numbers on your tax return are ending in zeros? The IRS probably isn’t going to like that. Numbers that seem too rounded can trigger an audit because it looks like you’re trying too hard to make everything add up nicely.
Unreported or Underreported Income
The IRS receives copies of your W-2s and 1099s each year, and it has a system that automatically compares the earning data it receives against what you report on your tax return. Any discrepancies are likely to trigger an audit. It is extremely important to have any errors that you spot on your 1099 addressed and corrected before you file your taxes!
Did you have a windfall year? The IRS may want to know more about it! A high income can increase your odds of being audited. In fact, about half of all of the audits that take place each year involve people who earn more than $1 million.
The Home Office Deduction
Few things excite entrepreneurs as much as the home office deduction. However, taking advantage of this tax perk could potentially pique the interest of the IRS and increase your odds of being audited. That’s why it’s so important to make sure all expenses related to your home office are properly documented. Keep in mind that having a television or dining table in your designated office area could make it hard to prove that you’re following the rules.
Claiming a Business Vehicle
Does your tax filing show that you use a specific vehicle for business 100 percent of the time? Unfortunately, the IRS doesn’t always buy this claim. The IRS knows that it’s pretty rare for someone to use a vehicle exclusively for business purposes. What’s more, not having another vehicle registered to your name can really raise some red flags. The solution is to keep very detailed records to prove that you’re using your business vehicle exactly the way you claim.
A return that features lots of deductions could attract the eye of the IRS. This doesn’t mean you should avoid honest, valid deductions – you just need to be extra vigilant to ensure any deductions you take are truly connected to your business. A qualifying purchase should be common, accepted, and useful in whatever industry you operate in professionally.
Filing a Schedule C
You may have to file a Schedule C if you own a small business. Unfortunately, this could put you in the hot seat. Be smart about maintaining proper documentation for every claim if you’re filing a Schedule C.
A business that loses money consistently could raise suspicions. The IRS knows that some people try to write off money that is spent on hobbies by claiming that the costs are related to a business. The IRS may verify that your business really is a business if you seem to lose money every year.
What Should You Do If You Are Audited?
What happens when that audit letter from the IRS arrives in your mailbox? Don’t ignore it – this is a problem that won’t go away on its own. You may be asked to answer questions or schedule a visit from a field auditor.
Whether you’re facing a field audit or an in-office interview, don’t handle it alone. You should bring a CPA to help you. If you don’t have a CPA, it’s time to get one. Before the interview or field audit, consult with your CPA to help you gather and make copies of all the documents you will need.
You may be wondering just how much you have to comply with what is requested, or if there’s a way to appeal your audit. The truth is that the audit process is complicated, and you risk penalties, fines, and other negative consequences when an IRS audit takes you by surprise.
Tax Group Center is here to make sure you don’t have to go up against a big agency all by yourself. We work directly with the IRS to save you hours of stress because we speak the language of the IRS. Our team of tax professionals has already helped thousands of people handle tax issues. Call us today to receive expert advice for handling your IRS situation.