No one enjoys a tax audit. It can cause a lot of stress even if you are sure your books are correct.
There is no guaranteed way of avoiding a tax audit. Each year, the IRS does a certain amount of random auditing in addition to those it implements because an irregularity has aroused its suspicion.
You can, however, avoid committing any of the errors that make a tax audit much more likely. Here are 4 things that act as red flags to the IRS when reviewing tax returns:
Failing to report all your income
The IRS cross-checks the payments employers say they make against the payments workers say they receive. If you freelance for several employers and forget to include all those earnings in your tax return, do not be surprised if the IRS wonders what else you might have forgotten to report.
You reported that your business made a loss
Most businesses make a profit, not a loss, so reporting a loss can ring alarm bells at the IRS. They will become even more suspicious if you have reported several years of loss. They’ll wonder how you can afford to survive, whether you have a secret source of income you are not declaring or have fiddled the figures to avoid paying tax.
Pushing the boundaries of expense reporting
The IRS knows that some people claim more expenses than they are entitled to, be it home office expenses, business travel expenses or any other allowable deduction. The rules around when you can claim something are specific, and if you are unsure, either get help to clarify them or play safe and only report what you are sure you are eligible for.
You report a very low or very high income
There is nothing illegal in this per se, but reports suggest the IRS has recently been paying more attention to those reporting under $25,000 and over $500,00 than those who report between the two figures.
If you are worried about an audit, already facing one or simply want to do your best to avoid one, it’s wise to get legal help to learn more.