7 Reasons the IRS Will Audit You
An IRS audit is an inspection or analysis of your records and accounts to ensure that you correctly record items and comply with the tax laws. In other words, to make sure you have no inconsistencies in your return, the IRS is simply double-checking your numbers.
State tax authorities also do audits, too. You don't need to worry if you're telling the truth and all the truth. Regarding an IRS audit or state audit, nothing is necessarily sinister. People who deliberately cheat the system, however, may have cause to be worried.
Why the IRS audits people
To eliminate the "tax gap," or the disparity between what the IRS is owed and what the IRS actually collects, the IRS performs tax audits. An IRS audit is often random, but taxpayers based on suspicious behavior are sometimes selected by the IRS.
1. Making math errors
"Oops" isn't going to cut it when the IRS begins investigating. Make no mistakes. For anyone who has to file taxes, this applies. Don't write a 3 instead of an 8 accidentally. Don't distract yourself and forget to include the final zero. Mistakes happen, so make sure that if you're doing your own taxes, you double-and triple-check your figures. Regardless of whether the error was deliberate, you would be charged with penalties. If your math is a little rusty, you can help prevent unfortunate mistakes that can lead to an IRS audit by using good tax planning software or a tax preparer near you.
2. Failing to report some income
Easy way to score an IRS audit? Don’t report part of your income.
Let's say you're employed by Farmer Joe's herding sheep and you pick up a little extra cash writing articles on a freelance basis for a sheep-shearing publication. You may be tempted to apply just the W-2 form from your herding job and keep under wraps the freelance writing revenue on your Form 1099.
Non-wage income from activities such as freelancing, stock dividends, and interest is recorded in 1099. Usually, one kind of 1099, the 1099-MISC, lists sums charged to independent contractors.
Okay, guess what? The IRS already knows about the profits on your 1099 because a copy was submitted to it by the newspaper, so it's only a matter of time before the omission is found.
3. Claiming too many charitable donations
You're eligible for certain well-deserved deductions if you have made substantial donations to charity. Common sense is this piece of advice: Don't disclose fake donations. Don't say it if you don't have the correct evidence to support the authenticity of your contribution. Simple enough. It is probable that seeking $10,000 in charitable deductions from your $40,000 wage would raise some eyebrows.
4. Reporting too many losses on a Schedule C
This one is for those who are self-employed. You may be tempted to hide revenue by filing personal expenses as business expenses if you are your own boss. But before you write off your new ski boots, take into account the suspicion that there might be too many reported losses. The IRS may start asking how your company stays afloat. Information includes IRS Publication 535.
5. Deducting too many business expenses
Too many expenditures are reported along the same lines as reporting too many losses. Purchases must be 1) ordinary and 2) required for your company in order to be eligible for a deduction. A professional artist may likely say paint and paintbrushes because both requirements are fulfilled by those objects. There may be a problem for a lawyer who paints for fun and does not turn a profit on the works. The questions to ask are: Was the purchase common in the trade or company and accepted? Was it beneficial and suitable for company or trade?
6. Claiming a home office deduction
Deductions from home offices are fraught with fraud. For expenses that do not actually qualify, it can be tempting to grant yourself undeserved deductions. The IRS describes the home office deduction broadly as reserved for individuals who use "exclusively and regularly for your trade or business" part of their home. That means a home office can qualify if you use it only for work and work. Responding to emails periodically on your laptop in front of your 72-inch flat-screen TV does not qualify your living room as a deductible office area. It could be more defensible to claim a home office deduction if you have set off a portion of your home solely for business purposes. When you record expenditures and measurements, be honest.
7. Using nice, neat, round numbers
The numbers on your 1040 form and supporting documents are not likely to be $100 at quick clean intervals. Be accurate and avoid making estimations when making your calculations. The nearest dollar is round, not the nearest hundred. Say you're a photographer claiming a business cost of a $495.25 lens; round that up to $495, not $500. Even $500 is a little unlikely, and the IRS might be calling for evidence.
Are you terrified of you, your business, or your non-profit getting audited by the IRS? Do you wake up in the middle of the night at the thought of hearing that knock on your door? Call Robert Arnone CPA today so you can get busy relaxing tomorrow! We also handle internal audits, of course. We specialize in helping HOAs, non-profits, small and mid-sized businesses make sure their books are in order so business leaders can sleep better at night. So if you’re even a little concerned, now is the time to act. Contact us today!