Maybe you’ve heard that the IRS doesn’t have time to audit more than 1% of all individual tax returns in any given year. But that’s small comfort when you’re among the 1% who gets audited! If you do be sure the contact the best Gilbert tax lawyers.
Who is most likely to receive that dreaded IRS Notice of Audit? The IRS is more likely to investigate and challenge the accuracy of your tax return when any of the following circumstances are involved:
1. You Missed Reporting Some of Your Income
The IRS computer cross-references your TIN or SSN with any and all W-2s and 1099s reporting money that was paid to you over the course of the year. A word to the wise – don’t try to outsmart the IRS computer by failing to report already reported income. And if a mistake was made in processing a W-2 or 1099, make sure that the payor notifies the IRS of the error and takes corrective action.
2. You Deducted for Entertainment and Travel
We’re talking about conducting business over dinner, traveling to other cities and states to sell your products, entertaining potential new customers, and of course lodging expenses. The IRS has a successful track record of collecting more in taxes when it scrutinizes the returns of self-employed taxpayers who deduct meals, travel and entertainment expenses. Whatever your business is, make sure to keep detailed records and save your receipts.
3. You Deducted the Use of Your Vehicle in Business
A lot of taxpayers use a vehicle in the exercise of their occupation. Depreciating a vehicle requires listing the percentage of its business use on Form 4562 – Depreciation and Amortization. If you claim the vehicle is exclusively used for business, then the IRS computer will red-flag the return for potential audit. When you have no other personal vehicle, claiming 100% use of a vehicle for business purposes is unusual, but it is not an impossibility. When claiming your vehicle for business use, always keep detailed mileage records. Should you use the IRS standard mileage rate, then don’t also try to deduct expenses for vehicular insurance, repairs, and maintenance.
4. You Deducted for an Office in Your Home
If you have an home office, then you can legitimately claim deductions for the portion of your home used exclusively for business. That includes rent, utilities, insurance, real estate taxes, and so on. Bear in mind, however, that you’ll draw the attention of the IRS computer. The reason for this is that the IRS has been fairly successful at collecting more in tax from those declaring exclusive use of their home for business. Exclusive means no other use; you must have an area that is used for no other purpose than business to claim the home office deduction.
5. Your Income was over $200,000
The greater the income, the greater the likelihood of an IRS audit. The overall audit rate among all taxpayers is 1.11% of returns filed. For those with incomes below $200,000 the audit rate is 1.02%. For those reporting incomes of $200,000 or more, the audit-rate is about one in every 25 returns or 3.93%. For those reporting incomes of $1 million or more, the audit-rate is about one in every eight. Therefore, higher income taxpayers are more likely to be audited by the IRS.
6. You Didn’t Report Your Offshore Account
If you have an offshore account, know that the IRS can assess severe penalties for any failure to report foreign bank accounts.
7. Your Extremely Generous with Your Donations
When you donate to charitable organizations, you ordinarily deduct those donations from your income on your tax returns. However, when your charitable giving makes up too much of your income, then your return is likely to be flagged by the IRS computer for audit. When non-cash donations are involved, you may need to file Form 8283 – Noncash Charitable Contributions. Not filing Form 8283 or failing to get an appraisal on valuable donated property only increases your chances of an IRS audit. Make sure you keep your donation receipts, too.
8. You’re Operating a Cash Business
When you’re business is heavily reliant on cash sales, such as a barber shop or a restaurant, then the business typically receives heightened scrutiny. This is simply because, in the IRS’s vast experience, cash businesses are more likely to have unreported income.
These are only a few of the circumstances that increase the likelihood of an IRS tax audit. Also be mindful that including unusually high deductions when compared to your overall income, having suspiciously large cash transactions, and declaring deductions for a hobby are also reasons for the IRS computer to select your return for an audit.