The mere thought of a tax audit by the Internal Revenue Service (IRS) can evoke feelings of anxiety and uncertainty, even for the most conscientious taxpayers. These audits involve thoroughly examining a taxpayer’s financial records and tax returns, and they can be a time-consuming, nerve-wracking experience.
The IRS conducts audits for various reasons, each rooted in the need to ensure tax compliance. Below are some common triggers that may prompt the IRS to take a closer look at your tax return.
Discrepancies on your tax return
One of the most common triggers for a tax audit is errors on your tax return. Even simple mathematical mistakes, incomplete information or inconsistent data can catch the IRS’s attention. It’s crucial to double-check your return for accuracy before filing to avoid such an eventuality.
Unusually high deductions or losses
Reporting abnormally high deductions or losses in proportion to your income can raise red flags with the IRS. While deductions are legitimate for reducing your tax liability, excessive claims should be supported with proper documentation to justify their validity.
Income underreporting
A significant disparity between your reported income and what the IRS expects, based on information from employers or financial institutions, can trigger an audit. Always ensure you report all sources of income accurately to minimize this risk.
Cash transactions
Engaging in cash transactions, particularly common in the gig economy or some small businesses, can increase your chances of an audit. Cash payments are harder to track, making them a target for IRS scrutiny.
Excessive business expenses
Claiming excessive business expenses without proper documentation can also trigger an audit. Business-related deductions should be substantiated with receipts and records, and they should be both reasonable and necessary for your line of work.
The prospect of an IRS audit can be a source of considerable stress and uncertainty. As such, it is imperative to approach your tax affairs with meticulous attention to detail and accuracy. Equally important is seeking qualified legal guidance to help avoid the common pitfalls and triggers that can lead to IRS audits.