Getting audited by the IRS can feel extremely stressful and overwhelming. The IRS is meticulous when reviewing questionable tax returns. We want our clients to be honest and informed when reporting to the IRS. We know sometimes audits are unavoidable and we are here to help if that ever happens. In the meantime, here are 5 red flags that can increase your risk of being audit.
#1 Failing to report all income
I know this sounds silly but it does happen. If you earn money in excess of $600 for the year from any “odd job” you should receive a 1099 form. This form will also be sent to the IRS. Failing to report this income is a red flag and the IRS will know. If you do not receive a 1099, you should report the income anyway. You can contact the person or company who paid you to send you the correct 1099 form. 1099s are required to be sent by January 31st of the following year.
#2 Simple Mathematical Errors
If you work for a company, you will receive a W-2 which is also sent to the IRS. If you prepare your own tax return and the numbers don’t match what is on your W-2 (or any other tax form), the IRS will pick it up. Their system will get an alert that something is wrong or off. The severity of the miscalculation will usually determine if there will be an audit.
#3 Saying Your Hobby is a Business
Many new businesses don’t see profits right away. Many times your expenses exceed your income. While you are still required to report this income and/or losses to the IRS, be aware that 3-5 consecutive years of only showing a loss will raise a red flag on the validity of your business.
#4 Taking Advantage of Certain Tax Deductions
There are certain deductions that raise red flags. That doesn’t mean you shouldn’t take advantage of them, it just means you have to be diligent in your paper trail with these.
Here are some to be aware of:
Charitable Donations: This is one of the most common deductions which means there is a lot of data for the IRS to use to pinpoint uncommon behavior. If you are donating a significant amount of money that does not fall in line with the typical donation in your income bracket, the IRS will get pinged.
Use of Home and Car: saying you use your home/car 100% for business is telling the IRS you do not use it for personal purposes. This is a huge red flag that could cause the IRS to take notice. It is imperative that you keep good documentation!
#5 Hiring the Wrong Tax Professional
This is a big one to be aware of. Hiring the wrong professional can lead to an audit even if you do everything correctly. If your tax preparer has a client that was audited, it is possible that the IRS will look into all the tax returns that preparer filed. Make sure you are using a reputable CPA or licensed company.
Some good news… only .4% of all individual tax returns in 2019 were audited. Plus, the majority of them were conducted by mail, which means most taxpayers never meet with an IRS agent in person. If you are audited, we highly suggest you consult a CPA.