Top 6 reasons for which IRS can audit you

An IRS audit is just the IRS double-checking your tax returns. They want to make sure that there have been no discrepancies in the process. In some cases, state tax authorities do audits as well. If you have been honest while filing the returns, you don’t have to worry about anything. Getting subjected to an IRS or state audit doesn’t mean that you have done anything suspicious. The IRS conducts tax audits because there are some people who try to cheat the system. Also, the IRS wants to reduce the tax gap. The tax gap is the difference between the amount IRS receives and the amount IRS actually owes. Sometimes, IRS audits can be random. However, sometimes, the IRS selects certain taxpayers who have been doing suspicious activities while filing the returns. Here are the top 6 red flags that can lead to IRS audits:

1. Making mathematical errors

When the IRS starts investigating you, you can’t just say that you made a mathematical error. You cannot afford to make mistakes. This is applicable to everyone who is filing their taxes. Don’t get distracted and write a 1 instead of 9 or forget to add the final zero. We understand that mistakes can happen. And because of this, if you are doing your own taxes, you need to double and triple check the numbers. The IRS won’t care if your mistake was intentional or not. They will hit you with fines. You can use a tax preparation software or hire a professional to help you with the returns. This way, you won’t be making any unfortunate mistakes that might lead to the IRS tax audit. 

2. Failing to report incomes

If you want to avoid the IRS audit, it is best that you report all of your income. This includes all the extra cash that you are earning by freelancing. You might be tempted to fill just the W-2 form for your main job and keep the freelancing income under wraps. In all cases, you have to file Form 1099 for any non-wage income from interest, freelancing, and stock dividends. For amounts paid to independent contractors, you have to file Form 1099-MISC. It is essential that you list all your income because the company you are freelancing for will be sending a copy to the IRS. So, sooner or later, the IRS will discover the omission that you made from your forms.

3. Claiming several donations

You are eligible for deductions if you have made major contributions to the charity. However, you should never report false donations. In fact, you shouldn’t even claim it if you don’t have the right documentation for proving your contribution’s validity. The IRS officials are not stupid. If you earn $40,000 annually, and you have claimed $10,000 in charitable deductions, they are going to get suspicious.

4.When you are self-employed or a freelancer

Many such taxpayers often hide their income by adding personal expenses to their business expenses. But, if you are filing too many losses, it can arouse suspicions. The IRS will wonder how you are even making your business stay afloat.

Freelancers and sole proprietors can claim certain deductions that other taxpayers can’t. This includes home office deductions, deductions for travel, meals, entertainment, and mileage deductions. All these expenses have to be filed on Schedule C. These are deducted from your earnings. The left income is then used for determining your taxes. 

The DIF score helps to look for deductions that are not normal for the professional. For example, if you are an art dealer, you can spend about 15% of your income on traveling every year. This is the same amount that other art dealers spend. Now, if you claim 30% of your income on the returns, the IRS will take a closer look. Your tax returns contain some occupational codes. IRS uses the DIF scores to ensure that your travel expenditures are similar to those who have reported with the same codes. If you claim a lot more than your professional’s average, you might get a second look from the IRS.

Another example of this is when you use your car for business purposes. You are eligible for expenses or mileage deductions. However, IRS doesn’t accept that 100% of your travel was just for business, especially when you don’t have any other vehicle.

5.Making several business expenses deductions

This is somewhat similar to reporting too many losses. For your expenses to be eligible for a deduction, the purchases must be ordinary as well as necessary for the business. Take the example of a professional artist. He/she can claim paintbrushes and paint as deduction as they are ordinary and necessary for the business. However, if you are a lawyer who likes to paint for fun and doesn’t earn any profit from it, you can’t add them as expenses. The purchase that you made must be common and accepted in your business. Also, the purchase should be appropriate and helpful for your trade.

6.Claiming a deduction for a home office

Home office deductions are often rife with fraud. You might try to give yourself deductions for expenses that you don’t actually qualify for. The home office deduction by the IRS is for people using a part of their house regularly and exclusively for their business. This means that you should be using your home office strictly for work purposes only. For example, if you are answering emails on your laptop while sitting in front of your TV in your living room, it is not a deductive office space. If you want to claim a deduction for the home office, you have to set off a part of your home for business purposes only. Also, you need to be honest about the measurements and the expenses.

However, even after you were honest and careful, you can be one of the chosen ones that the IRS audits. In such cases, you will need a professional by your side. The Platinum Tax Defenders is a tax resolution service that can help you with the IRS audits, even prevent it in the first place. Our tax relief experts will guide you through the IRS tax audit and make sure that you don’t open yourself up for any more scrutiny.