While the Internal Revenue Service (IRS) selects tax returns for audit through a combination of random selection and various risk factors, certain situations may increase the likelihood of being audited.
Running a business can be stressful enough, and the last thing you want is to be audited by the IRS. Even when a company has nothing to hide, it can be intimidating to handle an IRS audit.
More often than not, getting audited is more severe than the event itself. Most audits are done through the mail and may work out in your favor as long as you are honest.
Remember that it is essential to seek professional help if you are struggling with your taxes. The factors mentioned in this article do not guarantee an audit, and many audits are conducted randomly.
That being said, below are five things that may put you on the IRS’s radar.
Making More Money
According to IRS statistics from 2016, if you show a significant increase in income from one year to the next, your chances of getting audited can increase from 0.65% to anywhere from 1.7% to 5.9%, depending on your reported income.
In addition to the increase in potential auditing by moving into a new tax bracket, sudden increases in income – especially for self-employed individuals – will be red-flagged by the IRS, even when they are legitimate.
Filing Income Tax When It’s Unnecessary
If you file an income tax when you had no taxable income for the year, especially if you previously had, you are at higher risk of getting audited.
While you must file a return regardless of how much income you made, the absence of income will raise eyebrows in the IRS.
Not Reporting All Taxable Income
All taxable income is required to be reported to the IRS, especially if it is traceable.
The IRS receives copies of all tax forms that you receive. The IRS tracks anything paid to you by other entities, such as salary payments (W-2s or 1099s), dividend income, and interest paid. Tax professionals can review your files before submitting them to ensure you are not missing any pertinent information.
Improper Use of Reported Income
If you report income used for purposes other than stated, you increase your chances of getting contacted by the IRS. This typically happens when people invest money into an idea.
You are at perhaps the highest risk of getting audited by not paying or purposely underpaying taxes. There are many clues the IRS will look for to find individuals who are participating in tax evasion.
Some red flags include claiming 100% use of assets (such as a vehicle) for business, deducting business travel and meals, taking higher-than-average deductions compared to other companies in your field, or anything else that could be seen stretching the truth. This is especially true with self-employed individuals.
For some individuals, nothing is more terrifying than getting contacted by the IRS. In reality, these routine audits should be nothing more than a formality you must engage in as a professional. Audits are nothing to be concerned about for an honest taxpayer.
Are you keen to know more factors that may increase your IRS audit risk?
Foreign Bank Accounts and Income
The IRS is vigilant about offshore income and assets. Failing to report foreign bank accounts or income can lead to severe consequences.
Individuals with rental properties may be subject to audits, especially if there are discrepancies in reported rental income and expenses.
Frequent Use of Cash Transactions
A high volume of cash transactions without proper documentation may attract attention from the IRS.
Last Few Words
Please remember that attempting to evade or avoid an IRS audit through illegal or unethical means is not advisable and can lead to severe consequences.
The IRS has various methods to identify and address non-compliance.
To state the obvious, it’s essential to be honest and accurate when filing your taxes. If you’re unsure about certain deductions or have complex financial situations, consider seeking advice from a tax professional to ensure compliance with tax laws.
Keep thorough records and retain documentation to support your claims in case of an audit.