Tax Audit Red Flags
An IRS tax audit can either be intentional or done randomly. It can be intentionally done on tax returns of individuals and businesses that appear incorrect, or suspicious in order to verify the accuracy and honesty of the said return.
Because of the majority of taxpayers that tend to cut corners in order to avoid paying tax, the IRS is particular about tax audit and whenever they see a red flag on a tax return, it may attract the need for a tax audit. For other taxpayers, the chances of being picked randomly for auditing are very low especially for those without a very high income. However, this low chance isn’t a license for you to cheat on your taxes, as it is always preferable to be on the safe side of the law.
A tax audit might come up anytime, and to be found wanting can lead to a lot of unpleasant penalties for the individual.
For tax auditing, however, there are certain pointers or “red flags” that can probably make a tax return of an individual or organization look suspicious enough to the IRS to increase the chances of them being audited. A lot of checks would probably be done on your accounts and previous tax returns, sometimes as far as three years back or more depending on the level of inaccuracy found in your returns.
After routine checks by IRS, you would probably get a brown envelope in the mail notifying you about a tax audit from the IRS if your account seems suspicious.
Common Tax Audit red flags
The process of a tax audit is never fun for the taxpayers and therefore, the majority need to learn about certain areas or errors in their tax returns that can probably attract a tax audit by the IRS.
- A lot of Charity donations: Many individuals are more generous than others and some people actually love giving to help one cause or another. However, this has to be done wisely and with proper documentation of every donation given. You should also retain evidence to prove the value of non-monetary donations.
- Digital Currency: The IRS can decide to audit your tax returns if they discover you use a lot of digital currencies like Bitcoin, Ethereum, etc. This is so because a lot of people that make income from digital currencies refuse to report the income derived to the IRS.
- Claiming a lot of expenses on your home office deduction can also lead to a tax audit because many people list household expenses as part of their home office expenses.
- Not fully reporting all taxable income can lead to an audit.
- Deducting a lot of entertainment expenses like travel and business meals will surely attract an audit.
- Hiring an inefficient tax preparer can lead to a lot of inaccuracies in your tax returns that will definitely attract an audit.
- Making a lot of mathematical errors on your tax returns can bring about the need for an audit.
- Always claiming losses on business for years consecutively may also trigger an IRS audit.
- Taking alimony deductions especially if there is a mismatch between the amount reported by the payer and the receiver.
- Running an all-cash business always attracts the attention of the IRS or not reporting income on foreign accounts.
Preparing for an IRS Tax audit
For a lot of taxpayers, the idea of being audited by the IRS can be nerve-wracking and can throw them into an immediate state of panic.
However, the most important thing you need at this time is to have solid documentation to serve as proof for all financial claims made in your tax returns. Full, complete, and accurate documentation can be a source of confidence during this process unless there is actually an illegal activity going on. If there is really suspicious activity going on, then there really would be a problem.
It is, however, not always recommended that the subject calls the IRS by themselves or even attends the audit. It is more advisable to employ the services of a professional so as not to cause more problems for yourself and your business in the process.
Whatever the case may be, the need to get solid documentation as proof for all your financial dealings is highly recommended and needed. The most important thing in an audit is good record keeping. Below are some important tips that can help a taxpayer prepare adequately for an audit.
- Employ the services of a good tax professional that are adequately trained in tax law and can represent you better than you would represent yourself.
- Ensure you have solid documentation of all your financial dealings all year round that can serve as sufficient proof for your tax return report.
- For the financial dealings without good supporting documents, the taxpayer needs to go and gather proof. This can involve calling up your medical facilities, your workplace, etc. They will probably have proper documentation of your records for a duplicate at the very least.
- Read extensively about the tax audit process. Asking for advice from people that have also gone through a tax audit previously is also a smart idea.
- Be confident, the professional, and answer questions properly when you are asked. Be forthcoming with information and be organized with your documents.
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