Did you know that since 2022, the IRS has audited about 4 out of every 1,000 tax returns? It might sound like a slight chance, only 0.4%, so you might think there’s no need to worry. But think about this: lightning strikes about 5 out of every 1,000 houses yearly. Despite those odds, many homeowners invest in lightning protection systems to avoid damage. Similarly, an IRS audit that goes wrong can hurt your financial health. So, it’s essential to do what you can to avoid getting audited in the first place. Today, we will look into five reasons that can trigger an IRS audit. Read on to stay in the know, guarantee your peace of mind, and protect your finances.
Why the IRS Audits Taxpayers
The IRS performs audits to address the “tax gap” problem. The tax gap is the difference between how much taxpayers owe and how much they pay the IRS.
The IRS also audits taxpayers whose returns contain inaccuracies or red flags. Other times, a taxpayer could face an audit if their return has associated transactions with a separate audited return.
Math Errors in Your Tax Returns
Make sure all the numbers on your tax return are correct. The IRS pays close attention and won’t forgive any mistakes, even if they are unintentional. While mistakes are part of life, having any in your tax return can result in substantial fines or penalties. So, it is vital to double-check every detail, including decimal places, zeros, and numbers. For instance, be careful not to report $10.25 instead of $102.5.
If you are going to report your taxes yourself, consider using reliable tax preparation software. An even better alternative and more effective way to prevent mistakes is to hire a reputable tax professional to help you.
Not Reporting Some of Your Income
If you fancy a five-star audit ‘baecation’ with the IRS, receiving a buffet of fines and penalties, failing to report all your income is the way to go
Several situations can tempt you into reporting only a part of your income. For example, if you hold a job as a brand strategist for McDonald’s while offering some freelance branding services online, you may be tempted to file only the income you make from your full-time work. In this example, you will file only your W-2 form and default on filing Form 1099, which should show your online income.
Remember that the IRS has several systems in place for tracking financial records. Hence, the IRS may already have access to whatever information or records you intentionally withhold.
Claiming a Deduction for Your Home Office
Claiming a home office deduction isn’t a bad thing by itself. However, the IRS has seen so many past fraudulent activities with home deductions. According to the IRS, you are eligible for a home office deduction if you exclusively and regularly use a section of your home for business. But some bad actors abuse claim the home office deduction after responding to one or two emails in their living room, giving the IRS reasons to be more vigilant.
If you are going to claim a home office deduction, ensure that a section of your home is strictly for business. Also, report accurate expenses and measurements so you will be in the clear even if you face an audit.
Reporting Too Many Business Expenses
The IRS stipulates that you are only eligible for a business expense deduction if your purchase is ordinary and necessary for business operations. A carpenter could claim a hammer, as it is an item that meets both requirements. But the same won’t be valid for a college professor who engages in woodwork for fun and turns in zero profits. Why? Well, because the college professor likely does not need a hammer to do his college work.
So, the general idea here is to report only business expenses relevant to your business.
Reporting False Charity Donations
Charity donations come with some attractive tax benefits. But don’t let the benefits tempt you into reporting false donations. Never report more than your actual donations or figures that raise suspicion. For instance, reporting a $30,000 donation from a $55,000 yearly income would get the IRS on your back faster than you can say audit.
Key Takeaways
- Check Your Math: Make sure all your numbers add up correctly on your tax returns to avoid problems.
- Report All Your Money: Don’t leave out any income you’ve made. The IRS needs to know about all of it.
- Be Careful with Home Office Deductions: Only claim a home office if you really use part of your home just for work.
- Only Claim Real Business Costs: Deduct expenses that are truly for your business, not personal ones.
- Be Honest About Charity Donations: Only claim the amount you actually gave to charities.
- Get Help from a Tax Pro: A tax expert can help you file your returns accurately, significantly reducing the risk of an audit.
Following these steps can help keep your taxes in good shape and reduce the chance of the IRS knocking on your door.
If you need personalized help on any tax-related issues, don’t hesitate to contact the Tax Goddess team. We have helped our clients claim over $1 Billion in tax savings while ensuring compliance, and we will be happy to help you, too!
