Be Prepared: What Can Cause An IRS Audit?

Tax season is upon us, and though you may be dreading having to report your earnings, you’ll want to make sure you do it correctly. Filing mistakes and blatant fraud can lead to an IRS audit. As unsettling as that thought may be, it’s important to be aware of the various triggers that can result in the scrutiny of the Internal Revenue Service. What can cause an IRS audit? In this article, we’ll provide an overview of the most common reasons for IRS audits, as well as tips on how to reduce your chances of being audited.

1.  Key Points

·What are audit trigger points? Inaccurate information or missing information

·How to avoid it?

2.Failure to Report All Income

Failure to report all of your income is one of the most common reasons that you may find yourself facing an IRS audit. The IRS collects all of your income information from the various forms that you submit throughout the year, such as 1099 forms for income from investments or W-2s for income from wages, as well as income from self-employment. If you fail to report any of this income, the IRS can identify it and initiate an audit as a result.  To avoid this, it’s important to double-check that you have reported all of your income before submitting your tax return.

3.Misreporting Income or Expenses

One of the most common causes of IRS audits is misstating your income or expenses on your tax return. This could be intentional, such as leaving specific items out, or unintentional, such as forgetting to include a receipt for a deduction. It is important to always be accurate and truthful when filing taxes. The IRS has a variety of sophisticated methods for determining if a taxpayer has misreported income or expenses. If you are caught doing so, you could face hefty fines and penalties, as well as being required to pay back any taxes that should have been paid. To avoid an IRS audit due to misreporting income or expenses, always ensure you are being honest and accurate when completing your tax return.

4.Taking Excessive Deductions 

One thing that can trigger an IRS audit is taking excessive deductions. It’s important to accurately report all of your deductions on your taxes, including itemizing deductions if necessary. However, if you take too many deductions, the IRS may decide to investigate you further. Be sure that any deductions you take are allowable under IRS regulations to avoid an audit. When in doubt, consult with a tax professional to make sure you’re in compliance with IRS rules.

5.Underpaying Estimated Taxes 

One of the most common reasons for an IRS audit is underpayment of estimated taxes. When you are self-employed or have other sources of income outside of your job, you may be required to make estimated tax payments to the IRS. If you do not make estimated payments or do not pay the required amount, you could be subject to a tax audit. It is important to accurately estimate your taxes each year and make timely payments so you can avoid an audit.

6.Incorrectly Filing as a Business 

Filing as a business can be beneficial for those who run their own business, but it can lead to an IRS audit if done incorrectly. If the IRS finds that an individual is not running an actual business or is misclassifying their expenses and income, they can choose to audit. Incorrectly filing as a business can result in an individual being taxed on their self-employment income as well as potentially paying back taxes, interest, and other associated fees. To avoid an audit, individuals should make sure they are filing their taxes as a business accurately and in accordance with IRS regulations.

7.Claiming Large Charitable Donations 

Claiming large charitable donations is one of the top reasons for IRS audits. When claiming a large donation, the IRS is likely to take a closer look to make sure the deduction is valid. Therefore, it is important to be aware of the rules and regulations associated with claiming charitable donations. Documentation to substantiate the donation is critical when claiming large deductions. These documents should include records such as receipts from the charity, details from the charity regarding the donation, and a written appraisal of any non-cash donations. Furthermore, when claiming large donations, taxpayers need to be especially careful to avoid inaccuracies which could trigger an audit.

8.Claiming Too Many Dependents 

One of the most common reasons for an IRS audit is claiming too many dependents on your tax return. When you are preparing your tax return, you should always be sure to double check how many dependents you are claiming. If you claim more dependents than you actually have, it could trigger an audit as the IRS may suspect that you are trying to take advantage of them. Make sure to verify the number of dependents that you can legally claim and always ensure that you are accurately representing the information on your tax return.

9.How to Minimize Your Chance of an IRS Audit

When it comes to taxes, the last thing most of us want to think about is the dreaded IRS audit. But sometimes, circumstances can lead to an audit. To minimize the chances of your return being audited, it’s important to understand what usually causes the IRS to take a closer look at your finances. Here are some of the most common triggers for an IRS audit.

• Inconsistencies Between Your Tax Return and Your Income Reports: If the amount of income you report on your tax return doesn’t match the amount reported to the IRS by your employer or other payers, it has the potential to raise some red flags. That’s why it’s so important to double check your information and make sure that your numbers are accurate when you are filing your tax return.
• Large Deductions: If you claim a large deduction for business expenses, it can trigger an audit. To minimize your chances of an audit, make sure you have the necessary documentation to back up your deductions.
• Self-Employment Income: If you’re self-employed, the IRS is likely to take an extra close look at your finances. Even if you’re running a legitimate business, your return can be flagged if the numbers don’t add up or if your deductions seem too high.
• Home Office Deduction: If you’re claiming a home office deduction, the IRS may want to make sure that your office actually qualifies as a legitimate business expense. When claiming this deduction, be sure to keep detailed records and make sure that your office space meets the criteria set by the IRS.
• Cash Payments: If you accept or make large cash payments, the IRS may want to investigate to make sure you’re not engaging in any suspicious activities.

These are just some of the more common triggers for an IRS audit. To minimize your chances of an audit, make sure that your paperwork is in order and that you’re claiming only legitimate deductions. If you ever have questions about what you can and can’t claim, it’s a good idea to consult a tax professional.

Contact Surya Padhi at Sure Financials for any question and clarification. Surya Padhi is an expert who keeps current on tax law changes as well as a member of the National Association of Tax Professionals National Association of Tax Professionals (NATP) and  New Homepage - National Association of Enrolled Agents (naea.org). Visit Welcome | Sure Financials & Tax Services, LLC (surefintaxsvs.com) for more information and contact us by calling +1908.300.9193.