Have you ever wondered exactly what an IRS audit is? An audit occurs when the Internal Revenue Service (IRS) chooses to review a taxpayer’s accounts to verify that tax laws are being followed. Audits aren’t very common. According to the IRS, only 0.6 percent of individual returns were examined in the 2017 fiscal year. You can greatly reduce the chances of getting audited by being completely accurate and honest when you file your taxes. Anything that doesn’t seem right can increase the odds that you will be flagged in the system.
IRS Red Flags on Tax Returns
1. Earned lots of money. According to statistics from the IRS in the 2017 fiscal year, individuals who made between $200,000 and $1 million were audited at a 0.8 percent rate. If those individuals were business owners, the rate was 1.6 percent. Those that earned more than $1 million were audited at a 4.4 percent rate. If you make a lot of money you are more likely to get a notification from the IRS.
2. Self-employed. There is additional scrutiny from the IRS when you are self-employed. These returns are examined more closely than those of nonbusiness filers. You need to double, and triple check your numbers when you own your own business and keep an accurate paper trail to prove tax deduction are legitimate.
3. Running a small business at a loss. If you are self-employed and you’ve reported losses for three consecutive years, you may increase the risk of an audit. This is to determine if your business is a business where a loss is a deductible, or a hobby where it is not.
4. Forgot to report taxable income. According to the IRS, you are to report all income unless it is specifically exempt from being taxable income. Keep in mind that eh IRS gets its on copies of the 1099 and W-2 income forms that you receive. You don’t want them to see any omissions. Make sure you use all the tax forms you receive and track ones down that may have been lost or misplaced.
5. Typos or math mistakes on tax return. These errors may be honest ones, but if numbers don’t add up, your return may look fishy. Make sure you double check your work when you file your taxes.
6. IRS rounding instructions. You need to be specific when you itemize expenses. If all your numbers end in double zeros, it looks suspicious. The IRS may think you don’t have the documentation to back up your expenses, so keep accurate records and be specific when writing them off.
7. Something on tax return doesn’t add up. Any expenses that are proportionally unusual compared to what you made is open to more verification. For example, claiming large deductions on a small salary could warrant additional information from the IRS.
Bookkeeping & Tax Services in Salt Lake City, St. George, West Valley City, Provo, Orem, West Jordan & Greater Cedar City, Utah
Remember that IRS audits are rare. Make sure you can back all your numbers up and you should be fine. Good record keeping will help you endure the audit process should you find yourself in that situation. Contact Mark Dicus & Company for bookkeeping, tax services and more.