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Common IRS audit triggers...
Common IRS Audit Triggers
Having to deal with the IRS in any fashion is never fun; in fact, it can be extremely miserable and daunting. But perhaps the most dreaded interaction comes from being under audit. As such, understanding the factors can help you avoid unnecessary stress. Here are some common audit triggers and tips on how to steer clear of them.
1. High Income Levels
Individuals with high incomes are more likely to be audited. While you can’t change your income (and why would you want to?), ensure that all reported income is accurate and well-documented. Obviously, this is a problem you would rather have than not, but those higher income levels seem to get the IRS' attention like few other factors.
Pro Tip: Keep thorough records of all income sources, including side jobs or investments, to avoid discrepancies. If any income is foreign-source, make sure you get the statements and documents to accurately report your international income as foreign entities do not report income to the IRS.
2. Unreported Income
Failing to report all income, including freelance work and side gigs, can raise red flags (especially foreign-source income). The IRS receives copies of many income forms (like 1099s), making it essential to report everything. In essence, the IRS already knows what you need to report; so make sure you report what they expect you to.
Tip: Always report all income, even if you don’t receive a form for it.
3. Large Deductions Relative to Income
Claiming large deductions that don’t align with your income can attract scrutiny. For example, if you earn $50,000 but claim $20,000 in charitable contributions, it could raise questions. Mainly, the IRS is going to wonder how you're able to live while giving away 40% of your income to charity; and they're excellent at reconstructing your income; even if you don't report it all.
Therefore, keep receipts and documentation for all deductions, and ensure they’re reasonable compared to your income level.
4. Self-Employment Income
Self-employed individuals are often audited due to the nature of reporting income and expenses. The IRS pays close attention to business deductions and history suggests that 1099s are often not reported accurately. Additionally, often times small business owners struggle to keep business expenses separate from personal expenses, which raises even more red flags.
5. Claiming the Home Office Deduction
While the home office deduction can be beneficial, it’s also a common trigger for audits, especially if it appears excessive or unjustified. In all of my years with the IRS, nothing says "AUDIT ME" quiet like claiming the home office deduction! At the end of the day, only claim the home office deduction if you genuinely use a portion of your home exclusively for business.
6. Math Errors and Inconsistencies
Simple math errors or inconsistencies between different forms can lead to an audit. The IRS’ systems are designed to catch discrepancies. Make sure you double-check all calculations and ensure that all forms align before submitting your tax return.
7. Schedule C Losses
Claiming significant losses on Schedule C (for self-employment) for several consecutive years can raise questions about your business's legitimacy. What can happen here is that the IRS loves to come through and claim your business is just a "hobby." This gives them authority to deny all of your deductions while sticking you with all of the income.
Conclusion
By staying organized and being mindful of these common triggers, you can minimize your chances of an IRS audit. Remember, accuracy and thorough documentation are your best defenses against scrutiny. If there's any doubt as to whether you can deduct an expense, err on the side of caution.
However, if you do find yourself in this unfortunate situation, make sure to reach out to your premier audit defense company!
Now, back to worrying about the IRS so you don't have to!
P.S. Make sure you get your FREE copy of our SPECIAL REPORT: "The 7 Secrets The IRS Does NOT Want You To Know!" (simply click on the link in the previous sentence, scroll down to the second section of our home page, and download your copy today!)
Or, email us at: info@libertytaxdefenders.com for your FREE copy.
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