Nobody wants to pay more taxes than they must. However, there are things you can do to limit your risk of an audit. Doing one’s taxes requires an attention to detail. An attempt to minimize your tax liability by getting into the IRS’s grey areas can cause you more problems later on.
So it seems avoiding an IRS audit is impossible, but naturally, the chances that your tax return will be audited are very minimal. For the record, the IRS only audited 0.4% of personal tax returns in 2019. The good news is that many of the examinations or audits were done via mail, and taxpayers (individuals) had no reason to physically meet with an IRS agent. The bad news is that you will inevitably hear from the IRS if you refuse to identify the red flags in your return.
Here are a few red flags that may cause the IRS to audit a business.
Failure to Report All Taxable Income
The IRS has copies of the 1099s and W-2s you receive, and therefore, you have to report that income on your return. If there is a mismatch, indicating a red flag, expect to hear from the IRS.
You Make a Lot of Money
Only about one of 250 returns on individual audit happens. However, the odd increases with the income, especially if such an individual has business income.
For instance, a 2019 IRS statistic shows individuals with incomes between $200,000USD – $1million USD who file a Schedule C tax form only had a 1.0 percent audit rate. The more income your return shows, the higher your chances of alerting the IRS.
Mathematical Inconsistency
Whatever form of filing you do- electronic or paper form- you’re sending your information into a computer. If things do not add up, a red flag could be raised. While a math error won’t automatically bring the IRS auditor to your door, it will cause unwanted attention.
Overstating Business Expenses
Depending on your job type, you may not be reimbursed for numerous legitimate expenses as an employee. As a business, it is possible to be tempted to write off just an extra, which could be genuine deductions. But to avoid raising this red flag, ensure you do not deduct something that is not included on the approved list.
Home Office Cuts
The IRS has strict rules on what you can claim on home office deductions and how much. An attempt to claim too much raises a red flag.
Large Charitable Gifts
It is okay to be charitable, and there is no particular legal limit to how much money you can give away. But you have to be careful, making sure that your donation syncs with the norm; else, it will raise a red flag.
Home Businesses That Do Not Yield Much
If you are a sole proprietorship and you file a Schedule C tax return year in and out, and it shows a loss, a red flag becomes inevitable. Even with a profit but unreasonably small margin, it will get the IRS’s attention.
Inaccurate Reporting of the Health Premium Tax Credit
With the premium tax credit, individuals can pay for health insurance gotten via the marketplace. The IRS will certainly pick on individuals who receive the advance subsidies and refuse to file returns or erroneously report the credit.
Your Claim for Rental Losses
IRS auditors are on the lookout for large rental losses. Many taxpayers are being audited in the real estate profession because, according to the rules for claiming rental losses with no limit, a taxpayer must spend at least 50 percent of their working hours and over 750 hours in a year contributing and participating materially in real estate as a broker, landlord, or a developer.
In a nutshell, as a taxpayer, you have rights to the examination, appeal, collection and refund processes of your tax. But it is imperative to avoid certain red flags to steer clear of unwanted IRS attention. Having a team of bookkeepers to help you avoid those red flags will go far in alleviating the stress of an audit. Contact us today for a free assessment of your books!
If you would like more information on the topic, the IRS has a great deal at this site.
