Posted by BEST FINANCIAL GROUP LTD

Red Flags that could trigger an IRS Audit

Red Flags that could trigger an IRS Audit

There are times the IRS audit could just be random. According to history, no less than 1% of the American population is usually audited every year. While a handful of this is typically random, some audits are caused by innocent or deliberate actions of taxpayers.

We will consider some things that can flag you for an audit by the IRS. Knowing what these red flags are will go a long way in saving you the trouble and anxiety that comes with an IRS Audit.

Inflating Donating Amounts

According to the IRS, people can donate money, food, clothes to charities. These donations qualify taxpayers for deductions and some tax relief. It is the taxpayers that usually determine the value of the items donated. This is where the problem comes from.

The IRS mandates that items donated should be valued between 1% and 30% of the original price. Taxpayers, however, either do not know this or deliberately chose to ignore this and inflate the price. This could lead to an audit.

You can, however, avoid this by having an appraisal letter. An appraisal letter expresses an opinion of the fair price of the item. Donations of more than $5,000 require an appraisal letter.

Mathematics Error

Math errors, as simple as ordinary addition or subtraction, could trigger an audit. Humans are not above mistakes. This is why it is vital to double-check your tax forms to be safe. All columns of your form should add up, and the dollar value of the capital loss or gain should be crosschecked.

Uncle Sam does not trivialize simple math errors even though many might not count it.

Not Signing the Return

It is surprising that a large percentage of people do not remember to sign their tax returns. This is setting yourself up for the searchlight of the IRS. If you forgot to sign your return form, the IRS might assume you have forgotten to include other vital things. This will make them come for an audit. 

Under-Reporting Your Income

It can be tempted to hide some of your income from your tax return. This is especially true of freelancers and small businesses. This is, however, setting yourself for a penalty as you will have to pay back all the taxes you avoided and in some cases, with penalties. There is also the possibility of jail time should you be caught because the IRS classifies this as attempting to defraud the government.

Bear in mind that the system is not perfect; hence the IRS might not be able to tell that you are not reporting all income. There are, however, some situations in which people get caught. Accepting cash for your services, for instance, might set you up. Should the customer that paid the cash get audited, the IRS could trace the cash disbursement to your business. This is why you do not want to risk not reporting all income. 

Inflating Home Office Deduction

Home office deduction is meant to be tax relief. You, however, need not try to outsmart Uncle Sam. Taking off an excessive amount of money, for instance, could trigger a red flag. With this in mind, when analyzing the expenses associated with your home workspace, be modest.

If your deduction is too large with respect to your income, It can trigger a searchlight. Assuming you are an accountant working from home with a monthly income of $20,000. Tendering an home office deduction of $8,000 will trigger an alarm. Also, you will raise a few eyebrows if you write off the value of a new set of sitting room couch as office equipment. 

This means you should only deduct items that are relevant to your business. 

Income Thresholds

If you earn more than $100,000 per year, you have a high percentage of drawing the attention of Uncle Sam. You really can't do anything about it. According to some accountants, your chance of being audited is 0.014% once your yearly income crosses the five-figure threshold. People with lower income, on the other hand, have a 0.0065% probability of being audited. With this in mind, should your income cross the five-digit threshold, be sure you can prove this to Uncle Sam should the searchlight beams on you.  

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