No one wishes to be picked for an IRS audit. Fortunately, the agency audits less than 1 percent of all the tax filers in an annual year. How do you avoid making that one percent? Knowing what the Internal Revenue Agency is looking for can help you understand how the auditing process works and minimize your risk.
Here are eight reasons that may increase your chances for being audited.
1. Your Expenses Don’t Line Up
The Internal Revenue Agency analyzes millions of returns each year, so they’re pretty skilled at identifying the normal expenditure for someone in a particular line of work or with a certain income. If you earn $35,000 a year and claim to have $30,000 in employee wages that weren’t reimbursed, the agency will likely ask what’s up. Another red flag is claiming expenses that aren’t typical in your profession, such as big mileage claims if you’re running a business from home.
2. You Have a Foreign Bank Account
If you’ve opened up a foreign bank account, you may be subject to an audit by the IRS. The agency also requires Americans to file Form 8938 if the value of their foreign assets exceeds $75,000 during the tax year. Fail to do this, and you could get a $10,000 fine. If you don’t submit within the 90 days of getting a notice, you could receive an additional $10,000 penalty for each 30-day filing delay.
3. Your Charitable Contributions Are Disproportionate
If you’ve made several contributions to charity in 2018, you might qualify for some deductions. However, most taxpayers claim these at an average of 3% of their earnings. This bit of information is common sense; don’t claim fake donations. Claiming $15,000 in donations on your $50,000 salary is likely to raise some red flags. For larger contributions such as the gift of a property to a nonprofit organization, make sure you’ve got the documentation to prove the validation of your charity.
4. You Selected the Wrong Filing Status
It can be complex to identify the right filing status, especially when one partner is self-employed or doesn’t work. Also, a sudden change in your filing status can raise the IRS’ eyebrows. For instance, if you were recently divorced but file as head of household or single instead of married filing jointly, the agency may come knocking on your door to see what’s going on.
5. You filed an estate tax
The majority of Americans will never deal with estate taxes, which usually apply to properties worth $5.45 million or above. But if your wealthy relative recently passed away, the tax return you file for their estate could be subject to extra scrutiny. Around 8 to 10 percent of estate tax returns are audited in an annual year. The wealthier your passed away relative, the higher the chances of an audit. Anything above 5 million will attract the agency’s attention.
6. You made several transactions in cash
Cash doesn’t have a good reputation with the IRS. It’s easy to hide and difficult to keep track. As a result, cash transactions make it super challenging to know whether an individual who deals in cash is filing proper tax returns. So, if you have a job or a business where you receive the majority of your income in cash (think cab driver or a bartender), you might receive an audit call from the IRS. The tax agency also receives data about suspicious and large cash transactions from financial institutions, which helps it decide who to audit.
7. You claim home office deductions
Claims regarding business-use-of-residence is a standard red flag for IRS reps. The agency narrowly defines the home office deductions as funds reserved for individuals who use a portion of their home regularly and exclusively for business trade. That means a deduction can be requested if you’re using your home as a proper office. Remotely attending client meetings on your laptop while sitting on your L-shaped sofa won’t qualify your living room as a deductible space. If you want to claim any home office deduction, make sure to actually use a section of your residence strictly for business.
8. You didn’t report capital gains
Tax filers typically record a capital gain on “Schedule D” of their tax returns, which is used for reporting losses and profits on securities. Failure to report the gain can make the IRS suspicious. While the agency may identify and amend a small mistake and ding you for the balance, a bigger missing capital gain can make the agency put on its detective hat. Though your brokerage is going to send you the form that records your losses and gains, you’re solely responsible for mentioning them in your returns. Don’t assume that you can forgo mentioning the capital gain because the year-end tax report came late from the broker. Even if you file too early, you’ll need to send an amended return that provides the IRS with an explanation about your gains.
What If I’m Selected for an Audit?
Undergoing an IRS audit can be stressful. If you find yourself in the scope of one, take the following steps to make the best out of the situation.
- Find out why your return was picked for an IRS audit – While the tax agency should inform you as to why your file was chosen for an audit, it’s up to you to find out. The best way to do so is to ask. Your reports can be audited for one of the reasons mentioned above. Also, ask about the type of audit you’ll be experiencing. Most taxpayers are subject to an office audit where the IRS service Center asks them to bring specific documents into their local Internal Revenue Agency branch.
- Collect and organize your documents – Once you know the reason why you’ve been called, you can start gathering the relevant documents and slips. However, keep your search to the number of requested documents, and never send more than what you’re asked. Get duplicates if you can’t find the originals. Once you have all the papers, organize them to show the IRS agent that you’re a responsible professional. This may even result in the agency limiting their scope of the audit.
- Contact a Tax Lawyer – If you’re still overwhelmed with your situation, or have a field auditor coming to your residence, it can be a good idea to contact a professional lawyer.
The Tax Defenders are well versed in bringing tax relief to people all over the country. Unlike a CPA, we can also provide you with the safety-net of lawyer-client privilege. Contact us today to get started.
IRS conducts audits periodically to ensure that all taxes due to the government are collected. If you are not evading your responsibility to pay your taxes, there is nothing to worry about. However, sometimes they conduct this audit if something is wrong with the way you file your taxes and it does not coincide with other items such as expenses. Here are some reasons why the IRS might audit your account.