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IRS Tax Audit

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.

tax audit

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?

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3 Best Ways to Maximize My Tax Return for 2025?

It is difficult to stay updated on state tax changes. The Tax Foundation states that 39 states will implement tax changes in 2025, including individual income tax cuts in nine states. Staying informed about these changes, especially if you reside in one of the affected states, can be crucial strategies for maximizing your tax return for 2025. 

For example, consider the impact of the Tax Cuts and Jobs Act (TCJA) expirations in 2025. The Tax Foundation emphasizes that policymakers will be navigating the expirations of certain provisions of the TCJA in 2025. A Tax Foundation calculator can help you understand how these expirations might affect your personal tax situation. This analysis could reveal potential areas to focus on to maximize your tax return.

3 Best Strategies to maximize your tax return for 2025:

Maximize retirement account contributions.

Retirement plans are a key area for tax deductions. The IRS offers various tax-advantaged retirement plans, and the sources list several types, including IRA accounts, Roth IRA accounts, and 401(k) rollover options. Maximizing contributions to these retirement accounts can lower your taxable income and increase your tax return. 

  • Contribute to traditional IRAs and 401(k)s up to allowed limits
  • For 2025, you can contribute up to $23,000 to a 401(k) if under age 50
  • If over 50, you can make additional catch-up contributions
  • Traditional IRA and 401(k) contributions reduce your taxable income dollar-for-dollar

To maximize your 2025 tax return through retirement account contributions, focus on fully funding both your employer-sponsored 401(k) and an Individual Retirement Account (IRA). The key is contributing pre-tax dollars, which directly reduces your taxable income. For 2025, you can contribute up to $23,000 to your 401(k), and if your employer offers matching retirement contributions, make sure to contribute at least enough to get the full match – this is essentially free money. Additionally, you can contribute $7,000 or less to a traditional IRA, and if you’re 50 or older, you can make extra catch-up contributions of $7,500 to your 401(k) and $1,000 to your IRA. These retirement contributions not only lower your taxable income dollar-for-dollar but also grow tax-deferred until retirement. For example, if you’re in the 24% tax bracket and contribute the full $23,000 to your 401(k), you could reduce your tax bill by $5,520. Remember that the ability to deduct traditional IRA retirement contributions may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels, so consult with a tax professional about your situation.

maximize my tax return for 2025

Take Advantage of 2025 Tax Deductions and Tax Credits.

Utilize available 2025 tax deductions. The standard tax deductions for 2025, indicating that maximizing deductions is crucial. While specific deductions aren’t detailed, this highlights the importance of exploring all applicable deductions to reduce your taxable income.

Some 2025 Tax Strategies Can Be

  • Bundle multiple years of charitable donations into a single tax year
  • Keep records of business expenses if self-employed
  • Look into tax credits for energy-efficient home improvements
  • Consider contributing to an HSA (Health Savings Account) if you have a qualifying high-deductible health plan
  • Track education expenses for potential education credits

Optimize your filing status and timing of income/expenses

Consider the timing of major purchases or sales to optimize deductions. If married, calculate whether filing jointly or separately is more advantageous. Plan end-of-year income and deductions strategically. Keep detailed records of all potentially deductible expenses throughout the year.

Remember that tax laws can change, so you should verify with a free and dedicated RapidTax tax professional or the IRS website. Our dedicated tax professional can also help identify additional strategies based on your specific financial situation.

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Roth IRA or Roth 403(b) Has Greater Tax Advantage?

When deciding where to invest for retirement, the choice between Roth 403(b) and Roth IRA can be daunting. The abundance of options can make planning for the future seem overwhelming, especially when considering both employer-sponsored and individual retirement plans.

Exploring the realm of retirement investment options, two well-received selections emerge: Roth IRA and Roth 403(b) plans. By embracing these financial pathways, individuals can direct after-tax funds towards their accounts, ultimately providing tax-free withdrawals in the future. Delve into the distinctions between a Roth 403(b) and Roth IRA to empower yourself with the knowledge needed to navigate investment strategies and craft a secure financial future.

What are Roth IRA or Roth 403(b)

Here are the fundamental details you should understand about Roth 403b versus Roth IRA plans when preparing for retirement.

Roth IRA

Opening a Roth IRA empowers individuals to establish a personal retirement account independently, without relying on an employer. Most financial institutions offer the option to set up a Roth IRA, allowing individuals the flexibility to decide on their contribution amounts.

Distinct from retirement plans facilitated by employers, a Roth IRA allows for sole contributions by the account holder. You have a lower contribution limit same as in 2024, this year in 2025, $7,000  or $8,000 for 50 or older.

Despite not being exclusive to public school or nonprofit employees, there are limitations to consider when it comes to Roth IRAs. Individuals with a modified adjusted gross income (MAGI) above a specific threshold may face restrictions on their contribution limits. Further details on this will be explored in the following section.

Roth 403(b)

In the realm of retirement savings, a Roth 403(b) plan emerges as a valuable resource for employees of public schools and specific tax-exempt organizations. These plans, alternatively referred to as tax-sheltered annuity or TSA plans, provide a structured approach to accumulating post-work wealth. By choosing the traditional 403(b) plan, individuals can input pre-tax earnings while facing taxation upon retirement withdrawals.

In order to benefit from the advantages of a Roth 403(b) plan, individuals are required to make contributions using post-tax income, allowing them to make withdrawals free of tax obligations. One must be employed by a public school or a qualified tax-exempt organization to be eligible for this type of retirement plan; otherwise, employers generally provide a 401(k) plan as an alternative.

Roth IRA

How are Roth 403(b) and Roth IRA Different?

Roth IRA

  • Independent through a financial institution
  • Individual contributions only
  • Income limit imposed
  • Generally to withdraw must be 59.5 years of age and account must be at least 5 years old
  • No loans

Roth 403(b)

  • Employer-sponsored
  • Individual and employer contributions
  • No income limit
  • To withdraw must be 59.5 years of age
  • Loans allowed

Roth IRA and Roth 403(b) Availability

Distinguishing between a Roth 403(b) and a Roth IRA lies in their availability, with Roth 403(b) plans being accessible through public schools and select tax-exempt organizations, limiting eligibility. Conversely, Roth IRAs can be initiated at various banks and financial institutions. Following account opening, individuals have the flexibility to choose their contribution amounts within the set limits.

Roth IRA and Roth 403(b) Contribution limits

In considering retirement plans, it is important to note that there are restrictions on the amount you can contribute. Though both Roth 403(b) plans and Roth IRAs have similarities, the contribution limits vary significantly. For the year 2025, individuals can now contribute up to $23,500 to their 401(k)

In the upcoming year, the maximum annual contributions allowed for an IRA will continue to be set at $7,000. For those individuals aged 50 and above, the IRA catch-up contribution limit has been adjusted to reflect the annual cost of living, yet it stays fixed at $1,000 for the year 2025.

As workplace retirement plan participants who are single file their taxes, they will notice an adjustment in the phase-out range.

In the case of couples who file taxes together, an adjustment is made to the phase-out range if the spouse contributing to an IRA is participating in a workplace retirement plan. The adjusted range now falls between $126,000 and $146,000, as opposed to the previous range of $123,000 to $143,000.

In the scenario of an IRA contributor without coverage under a workplace retirement plan but married to a spouse who is covered, the phase-out range expands to $236,000-$246,000. This marks an increase from the previous limit of $230,000-$240,000.

In the case of a married person who files taxes separately and participates in a workplace retirement plan, the phase-out threshold ranges from $0 to $10,000 and does not change with annual inflation adjustments.

Tax Advantages of Roth 403(b) vs. Roth IRA

In a conventional retirement savings plan, taxes are typically paid upon withdrawal during retirement. However, the dynamics are different with a Roth 403b or Roth IRA, where contributions are made with after-tax dollars, eliminating the need for taxes upon withdrawal. While contributions cannot be deducted from taxes, the advantage lies in the tax-free growth of your funds, having already settled your tax obligations upfront.

Find your free RapidTax dedicated tax professional support today!