The phrase “tax audit” strikes fear into many of us. While tax audits can be unpleasant, however, they are, more often than not, minor inconveniences. In most cases, the IRS is looking to clear up a misunderstanding or address a math error. Despite the fact that IRS audits generally amount to a minimal disruption, it is always best to avoid them when possible. Here, we will discuss some of the most common reasons for an IRS audit in the hopes that this information will help you avoid some of the more common audit triggers.
What are the most common reasons for an IRS audit?
Mathematical errors and comparable mistakes are actually one of the most common triggers for an IRS audit. While these errors can be so simple, they can cause unnecessary headaches working to clear things up with the IRS. Be sure to check and double check your numbers so that you are sure everything matches upon your return.
Another common reason for an IRS audit is a failure to report income. Even if the failure was a mere oversight, it can significantly increase your chances of an audit. Your employer is required to issue you a W-2 for your earnings and provide a copy to the IRS. Independent contractors and freelance workers should receive 1099s and, even when not, are still responsible for reporting the income earned themselves. There are minimal exceptions to the general rule that all income should be reported to the IRS.
People who own businesses or are self-employed are commonly the subjects of IRS audits. This is especially true of business owners who deduct too many business expenses or consistently take losses in their business. If you are a business owner, only claim legitimate expenses and be prepared to provide the IRS receipts as proof in the event of an audit.
Because self-employed individuals have access to many tax deductions that are otherwise unavailable to other taxpayers, they are often subject to more IRS scrutiny. Sole proprietors and freelancers alike may take deductions such as home office, mileage, and means, travel, as well as some entertainment costs.
If you claim an extensive list of itemized deductions, you may also be flagged by the IRS for an audit. This is due to the general rule that the IRS expects people to live within their means. In other words, the IRS expects that your expenses will be in proportion with the amount of income you earn. Excessive itemized deductions often run afoul of this general rule and an audit will be triggered. The same line of thinking applies to those that appear to be donating too much to charity. While donating to charity is a great way to help out a cause near and dear to your heart as well as reduce your tax burden, donating too much can be suspicious. Unrealistically high donations are especially likely to result in an audit.
The best way to handle an audit is to take due care to avoid one altogether. This means doing the work to protect yourself on the front end. Should you need help avoiding an audit or handling an impending audit, talk to the knowledgeable attorneys at Regal Tax & Law Group, P.C. Contact us today.