Most clients are concerned with three important issues when it comes to filing their annual tax returns. Knowing how much you owe, how much your refund will be and how to avoid the dreaded IRS audit. Today, we visit how most IRS audits are triggered and how to prepare and avoid them.
The top reason people are audited are common mistakes by the tax preparer, either giving the incorrect information or making guesses as to what your income or deductions actually are. Even simple mistakes, as in writing your social security number incorrectly or mathematical mistake, can trigger an audit.
High income and excessive expenses will likely trigger audits. According to the Pittsburgh Post-Gazette, close to 10 percent of individuals who earn more than a $1 million dollars will be audited. Excessive expenses, especially with meals and travel expenses. Be sure to record and safe guard all receipts for these expenses which will provide proof for the IRS if your time is called.
Consecutive losses on your Schedule C, Profit or Loss from Business, will raise red flags. Theoretically, businesses are created as a source to generate income. According to the IRS, businesses should be earning a profit, three out of every five years. Habitual losses on your Schedule C could signal the IRS to consider your business as a hobby. If that happens you would only be able to deduct expenses up to the amount you earned from the hobby.
Forgetting to include income from a 1099, however small can also trigger an audit. The IRS will also receive a copy of the 1099 and not reporting the exact amount of the 1099 will draw the attention of the IRS. In the days of technology, it is easy for a program to search for missing or differentiated numerical values.
Higher deductions than your income level will generally produce, will trigger an audit. The most common of these are the Earned Income Credit and the Head of Household deduction. The taxpayers must meet stringent requirements for both of these items and will trigger an audit if the supporting documents for these items are not met.
The best way to avoid audits from the IRS is to keep good records and be honest. However, the IRS does have a random audit generator based on a computer scoring system, which is how the majority of the audits that the IRS performs are selected.
If you have any further questions or concerns about how to avoid IRS audits in the future, please do not hesitate to contact us.