Conducting an IRS tax audit, a methodical inspection performed by the IRS involves scrutinizing your financial records and details to verify accurate tax reporting, adherence to tax regulations, and the correctness of your tax calculations. Essentially, the IRS is cross-referencing your figures to confirm the accuracy of your tax return without any discrepancies. At times, state tax agencies also conduct tax audits to ensure compliance. If you are forthcoming and provide accurate information, there is no need for alarm. A tax audit from the IRS or state authorities is not automatically suspicious. Yet, individuals engaging in fraudulent practices should be prepared for potential repercussions.
In the event that you are chosen for an audit, the IRS will initiate contact by sending a notification letter. The audit process can be carried out either remotely via mail or in person through a meeting at an IRS facility, your residence, your tax advisor’s office, or your place of business. When undergoing an audit, individuals may need to provide specific documents requested by the IRS examiner for a thorough assessment. It is advised by the agency that taxpayers retain their tax records for a minimum of three years following filing, as the IRS holds the authority to audit tax returns dating back as far as six years in certain situations.
Ultimately, the auditor will decide if any adjustments are required to the tax return. In the event that modifications are deemed necessary, you will be presented with a recommended course of action and possible charges to resolve the matter raised during the audit. Should you have reservations about the findings, you have the option to schedule a meeting with a higher-ranking IRS official, pursue mediation, or lodge an appeal.
Why Did the IRS Tax Audit Happen to Me?
The IRS carries out tax audits to reduce the “tax gap” and ensure compliance with tax laws. The selection of tax returns for audit is sometimes done randomly, according to information provided by the agency. In certain instances, an IRS audit may be flagged when your tax filing includes dealings with a previously audited return, like that of an investor or business associate. The IRS typically targets individuals for audit based on any flagged irregularities in their financial transactions.
Frequent IRS Tax Audit Red Flags
1. Benefiting from Home Office Tax Deduction
It’s not uncommon to encounter fraudulent activities related to home office deductions. The allure of claiming unwarranted expenses as deductions can be strong. The IRS sets strict guidelines for the home office deduction, limiting it to individuals who utilize a designated area of their home solely for conducting business activities on a regular basis. This eligibility criteria emphasizes that the home office should be used exclusively for work purposes. When it comes to considering your living room as a deductible office space, simply responding to emails on your laptop in front of the TV may not meet the criteria. To make a stronger case for claiming a home office tax deduction, it is advisable to designate a specific area of your home exclusively for business use. Accuracy and truthfulness in reporting expenses and measurements are essential factors to be mindful of when seeking deductions.
2. Skipping Some Income
Neglecting to disclose certain earnings can increase the likelihood of being selected for an audit by the IRS. Suppose you fail to report a portion of your income, such as additional earnings from freelance writing while working as a car mechanic for John’s Garage. In that case, it may draw unwanted attention from tax authorities. Considering your financial documentation, it might be alluring to share solely the W-2 form reflecting earnings from your herding occupation while concealing the income from freelance writing noted on your Form 1099. The Form 1099 serves to document non-wage earnings derived from activities like freelancing, stock dividends, and interest. Among these, the 1099-NEC specifically outlines payments made to independent contractors. The income reported on your 1099 has already been shared with the IRS by the issuing party, meaning it won’t be long before they uncover any information you may have left out.
3. Math Mistakes
When it comes to dealing with the IRS, accuracy is key. Making errors in your math calculations can lead to serious consequences. It’s important for everyone required to file taxes to stay focused and double-check their work. A small oversight could result in a big problem down the line. It is important to be diligent when it comes to doing your taxes to avoid any unnecessary fines. Mistakes are bound to occur, so always remember to thoroughly review your numbers multiple times to catch any errors, whether they are unintentional or not.
4. Too Many Donations to Charities
If you have generously donated to charity, you may qualify for deductions that you rightfully deserve. It is crucial to adhere to this sound advice: refrain from declaring fictitious donations. Without the necessary paperwork to verify the authenticity of your contribution, it is best not to assert it. This concept is straightforward. Declaring $5,000 in charitable deductions when earning a $20,000 salary is bound to attract attention.
5. Claiming Huge Losses on a Schedule C
For individuals who work for themselves, there may be a temptation to blur the lines between personal and business expenses. However, before claiming every new gadget as a business expense, it’s important to be mindful of the potential consequences. Excessive reported losses might pique the interest of tax authorities, causing them to question the financial health of your business. For more information on this topic, consult IRS Publication 535.
6. Tax Deduction from Business Expenses
Similar to excessive loss reporting, excessive expense reporting can also raise concerns. For a purchase to qualify for a tax deduction, it should be both commonplace and essential for the business operations. For instance, a professional car mechanic may likely seek tax deductions for acquiring tools and gadgets, as these items satisfy both criteria. Consider the scenario where a legal professional indulges in painting as a hobby without seeking financial gain from their creations. Key inquiries to ponder include: Did the acquisition align with customary practices within the industry? And did it lend support and relevance to the profession?
