A tax audit, as the name suggests, is an audit by the IRS to double-check your numbers. Typically, it is just to ensure that your return does not have any discrepancies. But the sheer idea of the involvement of the IRS can give you jitters. However, you need not fear if you are telling the truth. A tax audit does not always mean that something is wrong. It could even be caused due to manual errors. On the other hand, it can have serious implications for those who are cheating the authorities. Before understanding how to deal with the situation, you need to know why it arose in the first place. Here are some reasons why the IRS could audit you.
Data entry errors
Such errors are common when you transfer information because there are a lot of fields that you need to fill while filing returns. The possibility is all the more as you work with numbers in tax returns. Something as simple as misspelling your name or entering an incorrect social security number may cause a problem. Mathematical errors can be another trigger for the IRS. You can considerably reduce the chances of such errors by opting for e-filing. In case you are filing a paper return, do check every field twice or thrice.
Unlike manual errors, something like unreported income becomes a more serious cause of an IRS audit. It may be tempting not to disclose a fraction of your income to save up on taxes. But think twice before doing so because the IRS keeps track of everything. Whether it is about foreign bank accounts, K1 income or alimony receipts, show everything in your tax return. IRS also keeps an eye on your income year to year. Any discrepancies can raise suspicion and make the authorities take notice.
Deducting too many work expenses
Do not deduct too many work expenses from your return. Only claim the ones that are ordinary and necessary to the line of your work. For example, a professional artist can seek deduction for expenses on paints and paintbrushes. But a doctor who paints as a hobby cannot claim a deduction for art supplies! The key is to understand whether the expense is essential to performing your work duties.
If you make some charitable contributions during a financial year, you can claim tax deductions on them. However, do not overstate deductions because it can be a red flag for the IRS. You can even seek the advice of an expert tax attorney if you are making a large donation. Do get a receipt from the organization you are donating to and submit it with your return. Never report a false donation because the authorities will come to know in any case.
Claiming non-existent dependents
Another situation that you must avoid is claiming non-existent dependents. People sometimes try to scam the authorities by claiming the children they do not have. In some cases, the claim could be an unintentional mistake. This usually happens for a split couple where both end up claiming dependent children. Closely follow the IRS guidelines to decide whether you can claim someone as a genuine dependent or not. Don’t try to cover up because they will find out.
Wrong filing status
Determining your filing status can be tricky, particularly when you are married. Couples with one spouse being self-employed or not working usually do it wrong. Also, the IRS will notice if you suddenly change your filing status, as after divorce. In such situations, it is best to consult a seasoned tax professional who can help you file your status properly.
Self-employment and home office deduction
If you are self-employed, you have chances of getting an audit. The IRS tends to scrutinize people who are self-employed, particularly if they do not report a profit for 3 out of 5 years. Similarly, home office deductions may not always go well with the IRS. They reserve it only for people using a part of their home regularly and exclusively for trade or business. Simply speaking, you cannot claim a deduction when you cannot justify that you are using a part of your home only for work.
The IRS keeps a consistent watch on the taxpayers. For this reason, you need to be regular with your returns. Stating correct facts and information is critical if you want to avoid an audit. Have supportive documents with your return to give validation for your claims. And if you still get an audit, do not get hassled if you have done nothing wrong. Consult a professional attorney to handle your case and get you through.
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