IRS Audit Warning Signs (And How to Avoid Them)

Because of technological advancements in the detection systems of IRS, detecting red flags has become easier for the IRS and this has led to increasing number of audits. It starts with a letter asking for more information and might also involve an in-person meeting with an official. There isn’t any cause of worry for taxpayers who maintain proper paperwork and can logically defend their filings. However, an audit can still be triggered and if these IRS audit warning signs are kept in mind, it would be easier to deal with the follow up –

• Major Income Changes – If there are major changes in the reported earnings in the current year, as compared to the last year, this could be a red flag for the IRS and might mean that the taxpayer is under-reporting earnings. So, for people whose income was drastically less in the current year, proper paperwork is the best way to deal with the situation.

• Self Employed People – Red flags are typically raised for self-employed people because they often claim home expenses as business expenses. The best bet is to keep track of all the credits and deductions taken with the help of properly maintained paperwork.

• Hobby Expenses Claimed As Small Business Expenses – Making wooden toys for friends is a hobby while selling it online is a small business. However, a lot of people claim hobby expenses as losses and writing off their cost is illegal under tax laws. It could raise red flags and trigger an audit.

• Deduction of Car Expenses – Car expenses can only be claimed as a business expense when the car is being used for business related purposes. The correct way to claim this deduction is to maintain detailed records of the personal and business uses of a car. This is a common red flag item and one of the biggest IRS audit warning signs.

• Charitable Donations – For donations of more than $500, form 8283 must be filed by the taxpayer. Many people inflate these donations and claim various under $500 deductions under charity. IRS is in the habit of double checking such people. To avoid this, charitable deductions should not be inflated and proper record should be kept of deductions made. For charity over $500, the requisite form should be filed.

• Overseas Bank Accounts – Since the last 2 years, the reporting requirements for overseas bank accounts have been increased. This is why people who have overseas bank accounts are often audited because IRS is on the lookout for any account that may have been missed. For taxpayers who have such accounts, all of them should be reported to avoid an audit.

• Mismatching Numbers – All the numbers entered in the form must add up and tally with each other. The IRS has software and experts who can take one look at the form and question the disparities. Thus, the form should be filed carefully because a mistake might be treated as an attempt to evade tax.

Keeping these IRS audit warning signs in mind and always maintaining paperwork thoroughly can often solve the problem at the letter stage.

Sorry, comments are closed for this post.