What is an Audit?
An IRS Audit is an inspection of your tax records to ensure you’re filing your taxes legally and accurately. To put it another way, the IRS is simply trying to confirm the authenticity of the income and deductions in a tax return, whether it belongs to an individual, corporation, or nonprofit organization. Aside from getting a refund, many individuals dread receiving notification from the IRS; talk more about getting an audit notice. But should you be so anxious when you get an audit? You don’t need to worry; we’ll provide you with some IRS audit tips.
What could trigger a Tax audit?
Some actions are more likely to cause the IRS to raise eyebrows, putting you at a higher chance of getting an audit. These include:
1. Making clerical/mathematical errors:
These errors may vary from omitting a figure or entering a wrong figure to very complex calculations, such as when a taxpayer enters an incorrect filing status or a salary that doesn’t align with that on their W-2 form, wage, or tax statement, etc. It’s best to double-check the amount you are entering and your calculations.
2. Not disclosing some income:
Employers must file a W-2 that shows their employers’ income. Similarly, freelancers and contractors who earn more than $600 are required to file form 1099s. Upon presenting this record, the IRS automatically verifies that your reported income matches your employer’s record. The agency also gets alerted of additional sources of income such as interest or earnings from savings accounts, investments and stock trades, gambling wins, inheritances, etc. Hence, you risk being audited if you do not disclose all your income but part of it. Could you permit me to give an illustration? Perhaps you work as a teacher and do freelance marketing on the side. It would be best if you weren’t inclined to report only your income as a teacher. It won’t take long before the IRS finds out. Thus you should report ALL sources of your income to avoid falling into the Audit net.
3. Reporting excess losses on your Schedule C (1040 form):
Schedule C is typically used to report business profit and losses. The IRS will certainly smell a rat if you keep reporting personal expenses as business expenses to flee from your tax obligation.
4. Approximating numbers incorrectly:
Quiet agreeable some figures might be simple, and some others might be somewhat complex, involving decimals and the like. The way you approximate these numbers matters a whole lot. Rounding off numbers involving decimals to the nearest dollar is ideal. For instance, if you’re claiming $213.13 as an expense, you should approximate to the nearest dollar, which is $213.
5. You earn a lot of money:
The IRS is most likely to audit taxpayers who make lots of money. In the report of the IRS, about 2.53% of taxpayers who earn between $1 million to $ 5 million were audited in the year 2015. Similarly, reports also showed that 8.1% of taxpayers that earn above $10 million were audited.
6. Claiming home office deduction:
Claiming a home office deduction will likely increase your chances of being audited. This is because this deduction is rifled with fraud. According to the IRS, home office deductions are only available to those who “exclusively and routinely” utilize a portion of their home for their profession or business. So long as you use your home office solely for work, it can count. However, many people misinterpret the rules applicable to home deduction, while others try to cheat the system. For example, it will be very typical for the IRS to raise some suspicion if an automotive electrician claims a home office deduction. The reason being some professions typically do not need home offices. Similarly, the IRS will suspect something fishy if you claim too much space for your work office.
IRS AUDIT TIPS
Should you get an audit, the following IRS audit tips will help.
1. Read the letter’s content carefully:
Ensure you read through the letter very carefully. Scrutinize every bit of the information and read between the lines. Consult a tax professional to help you review the audit letter to recognize any concerns the IRS has raised.
2. Get your records ready:
When preparing for an audit, you should have supporting documents such as invoices for income and expenses, bank statements and canceled checks, receipts, accounting books and ledgers, hard copies of tax-prep data, and leases or titles for business property in place. If you are missing receipts or other documents, you can reconstruct records. Having everything prepared and ready when you enter an audit can impress the auditor and show them that you’re trying to help things run smoothly.
3.Keep your responses as concise as possible:
Auditors can pay close attention to everything you say. For this reason, you shouldn’t divulge more information to the auditor than she is entitled to and only speak when it is absolutely required. Similarly, you shouldn’t bring any documents to an audit that are unrelated to the year being examined or that were not expressly requested in the audit notice.
4. Get a tax professional:
Dealing with the IRS can be stressful, so it’s best to hire a tax professional through an IRS Enrolled Agent search. A tax professional can typically render tax consultancy services, including representation before the IRS. They are versed in audits and IRS strategies. Thus, seeking their services will increase your chances of pulling through an audit. If searching for a tax professional, you should beware of tax consultancy firms that spring up during the tax season. Many of them are not tax professionals; they will eventually disappear afterward. These individuals will make you waste your money and time without getting any reasonable solution.
In closing, getting an IRS audit notice can be fear-inducing for lots of taxpayers. There are several triggers for IRS audits. Knowing these triggers can decrease your chances of being audited.