When you file your taxes at the beginning of each year, the last thing you want to think about is your potential for getting audited. The fact is that the Internal Revenue Service audits very few returns. However, there are certain things that appear on returns as red flags to the IRS.
Failure to report all your income
Although this is usually an honest mistake, failing to report all the income you received in a year could trigger an audit, and it is one of the easiest tax issues to avoid. In most cases, it was simply an overlooked form or one that arrived after you filed your taxes. Should you receive an income form after you have already filed, it is critical to complete an amended return to avoid penalties. Any tax form you get reporting income will also be sent to the IRS, and the organization does cross-reference income with tax returns. It is possible the IRS will simply send you a letter to inform you of the discrepancy, but the letter will include fees and penalties on top of the extra tax you must pay.
Excessive business deductions
There are certain business deductions that the IRS will look at closely. If you claim travel expenses of more than 20% that is normal in your industry, the IRS may want to get a second look. Although almost every profession can have business-related meal expenses, make sure to keep excellent records regarding why a meal was business-related in case the IRS asks for additional proof. If your business consistently reports a loss, particularly a significant loss, this could trigger an audit.
The IRS will compare income to the deductions you claim. If any of your deductions seem excessively high, the IRS may ask questions. If your income is only $25,000 and you report a $15,000 charitable donation, the IRS will likely want proof of those expenses. Never attempt to “pad” your deductions in order to get a higher refund as you will have to provide proof to the IRS that you actually were entitled to those deductions. Tax issues like this can lead to significant fees and penalties as it is rarely done accidentally.
Tax issues can be costly and devastating to your financial health. If you have received a letter from the IRS, it is important that you speak to an attorney as soon as possible about what to do next.