Why Would the IRS Audit a Tax Return?
Tax returns, supporting papers, and other financial accounts and information are all subject to an IRS audit to verify the correctness of the information presented on the return, including income declared. In most cases, the IRS may only conduct audits of tax returns filed within the past three years, although there are exceptions. Avoiding an audit or worse, a federal tax evasion charge is paramount, come tax season.
Tax Return May be Audited Because of the Following Traits or Attributes
Earnings That are Underreported
You might increase your chances of getting audited by not reporting all your revenue. The IRS automatically receives a copy of each W-2 or 1099 you get for your taxable income. Whenever you submit your tax return, the IRS will check to see whether the amount of income you report matches the amount they have on file. You’ll likely be called in for an audit if the numbers don’t line up.
Making a Huge Income
Small company owners who earn a modest living aren’t a priority for the Internal Revenue Service (IRS). When it comes to organizations and people making more than $1 million a year, their enthusiasm spikes; as a result, being a high earner might be a red flag for the IRS.
Having a Significant Shift in Your Expenses Or Income
The IRS might scrutinize your tax return if you reported a profit, for example, $300,000 in the previous year and just $100,000 this year. Similarly, if your revenue significantly increases yearly, you may be subject to an audit.
Filed Returns with Math Mistakes
Even if the mistake is in favor of the IRS, the IRS is likely to flag your return for an audit because of errors in addition or subtraction. Tax software shields you from this specific red signal because it does all computations for you.
Receiving Tax Credits for Children in Advance
Qualified taxpayers receive half the entire credit as monthly payments in advance; the other half is requested after their current year’s tax returns submission. IRS’s 2022 Audit Plan mentions that it would evaluate systems and procedures to verify that Child Tax Credit advanced monthly payments are correct and only provided to taxpayers who fulfill the qualifying conditions.
Claiming a Business Out of a Hobby
The hobby loss rules restrict deductions for activities that are not done for profit, whereas costs related to the creation of income or investments are often deductible. Losses connected to activities not engaged in for profit are effectively disallowed by the IRS, which recently revised its guidelines, and taxpayers may only deduct expenses that fall under section 183.
Filers of Schedule C
The IRS has a particular interest when a firm relies heavily on cash. Self-employed individuals who underreport their income or inflate their expenditures have been the subject of several audits by the IRS. Just be sure that your records back up the information you provide.
Claims of Using a Vehicle Only for Business Purposes
Using a car only for business reasons is uncommon, and the IRS is aware of this. It is almost impossible to prove that the car is used only for work purposes if you do not have a particular personal vehicle registered. The IRS will likely get involved if you claim that a car is being used only for business purposes. A thorough audit of your records becomes even more necessary if your claim is for a more significant proportion of the total.
In such cases, the IRS suspects dependents. This includes last name variations, frequent usage of Social Security numbers, and tax return discrepancies. Tax preparers must answer any queries before submitting their customers’ returns, and they may be criminally liable if they assist them in making fraudulent IRS representations.
Avoiding the Submission of Foreign Bank and Financial Account Information
Foreign banks with assets of $50,000 or more must be reported on Form 8938 in obedience to the Foreign Account Tax Compliance Act. If you don’t record your international accounts, your tax return may be subject to more scrutiny, but if you do report your foreign accounts, it might suggest that you’re trying to conceal assets abroad.
Claiming Home Office Deductions
Work-from-home expenditures qualify for the home office deduction. The IRS has tight rules concerning when and how much you may deduct, so know them before filing. The IRS may require you to justify a substantial home office deduction.
More straightforward tax returns mean less IRS scrutiny. Using the standard deduction instead of itemizing reduces disagreements. Deductions and tax credits also help. If eligible, use these tools. If you’re audited, be prepared with papers. If the audit shows you filed an erroneous tax return, you may be fined a 20% accuracy-related penalty. If the IRS finds egregious misstatements or fraud, the penalty might rise. Occasionally, criminal charges occur.
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Seppi Esfandi is an Expert Attorney who has over 21 years of practice defending a variety of cases.