Everyone has heard about IRS audits. The Internal Revenue Service (IRS) examines your accounts and the information you provide to make sure you report things honestly and follow all the tax laws. The IRS double-checks the numbers so you do not have inconsistencies in your return. The following write-up specifies a couple of reasons the IRS might audit you. Please check them out now.
Why does the IRS Audits a Person?
According to a renowned tax law attorney, the IRS audits to reduce the ‘tax gap’. There is a huge difference between what people owe the IRS and what they pay the IRS. Audits can be random, but IRS generally chooses taxpayers based on dubious activities. Mentioned below are the top four reasons you will likely land amidst an IRS audit.
Made Math Errors
The Internal Revenue Service never forgives any mistake. Do not accidentally write an 8 instead of a 3. Do not forget to include the last zero. If you are doing your taxes without third-party assistance, try going through your numbers as many times as possible.
You will be fined even if your mistake was unintentional. If you are not confident about your math, consider using the best tax preparation software or appoint a qualified tax preparer. Doing so can help you keep IRS audits at bay.
Incorrect Filing Status
At times it gets difficult to analyze the correct filing status. It gets more intimidating when you are married and your spouse is self-employed or does not work. Having insights from reputed tax experts (including a tax attorney in Fremont, CA) will help you make the right property choice.
A sudden change in the filing status can also bring you to the notice of the IRS. For instance, if you have recently been through divorce and filed as single or head of the household rather than married, the IRS might get more interested in getting into your business and seeing what’s happening around you.
Failed to Report Certain Income
The easiest way to score IRS audits is not reporting a certain part of the income.
Suppose you are hired to herd sheep by Farmer Joe. You earn some extra cash by writing articles on a freelance basis for the sheep-shearing journal. You are tempted to submit the W-2 form from the herding job and keep the freelance income on Form 1099 under the rug.
1099 reports the nonwage income or money you pick from freelancing, interests, and stock dividends. One kind of 1099 reports the amounts independent contractors receive.
Well, the IRS knows about the income listed on 1099 because the journal you wrote for sent them a copy. It is only a matter of time before they find out about the omission.
Deducting Too Many Business Expenses
Reporting too many losses is reporting too many expenses at the same time. In order to get eligible for a deduction, the purchases should be ordinary and crucial for the business. For example, a professional painter or artist can claim paint and paintbrushes because these items fulfill the requirements. But on the contrary, a doctor who does painting just as a hobby or for fun and doesn’t make a profit might face problems. Make sure to ask questions like
- Were the expenses common and accepted in the trade or business?
- Was it useful and right for the purpose of trade or business?
Claimed Multiple Charitable Donations
If you made sufficient contributions to the charity, you are eligible for a few well-deserved deductions. But never report fabricated donations. If you do not have proper documents to prove the legitimacy of the contribution, please do not claim it. Asking for $20,000 in charitable deductions when your salary is $50,000 will surely raise eyebrows.
Use Neat, Nice, Round Figures
According to a well-known IRS audit attorney, the numbers on the 1040 form and associated documents can never be in clean, simple intervals of $100. When calculating, be accurate and do not depend on estimations. Round to nearest dollar and nearest hundred.
Suppose you are a photographer. You plan on claiming a $395.25 camera lens as a business expense. You can round that figure to $395 but not to $400. An even $500 is unlikely, and the IRS would ask to see proof.
After the audit, the IRS proposes taxes and penalties. You will receive a statutory note of deficiency. You will have ninety days to appeal to the tax court. If you do not take any action, the IRS ends the audit and begins the tax collection procedure. So, now that you know things make sure to move carefully. Also, share your insights on how you found the post below in the comment section.
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