The Internal Revenue Service (IRS) is always on the lookout for those who try to evade the tax laws. One way of apprehending such people or organizations is by auditing the tax returns filed at the IRS. There are many reasons for the IRS to mark a tax return as needing closer scrutiny. Knowing these reasons beforehand allows tax filers to avoid a possible tax audit. However, it should also be mentioned that not all taxpayers are subjected to tax audits and it is a mere 1 percent of all taxpayers that are subjected to such audits.
Submitting inconsistent information is one of the main reasons for the IRS to become suspicious and launch an audit on the provided income statements and on the claimed deductions. In most instances, when you are paid by cash, receive Form 1099s or income from other sources, there is a likelihood of your presented income statements not matching the income information received by the IRS through other sources. Therefore, the tax return should include all the income you received within that particular tax year. In addition, inconsistencies in the bio-data, especially in the surname and in your or your significant other’s social security number may also lead to red flagging your tax return as necessitating an audit.
Large sums of deductions
According to experts, large sums of deductions, which sometimes go beyond double-digit percentage of your total taxable income, could trigger a red flag at the IRS. In general, charitable donations will be eligible for tax deductions. However, the norm for such deductions would be around 1 to 2 percent of the total taxable income. At the same time, audit red flags are raised when claiming deductions for donations valued above market worth. When making such donations, one should be careful to back up such claims by presenting the cancelled check, or by presenting a letter issued by the charity in receipt of the donation. Meanwhile, credit obtained for studies can also be deducted as long as you claim them within a specific period that does not raise suspicion at the IRS. For example, claiming education expense credit long after the educational program is completed.
Home office deductions
Claiming home office deductions can also be a tricky thing as the IRS believes that such claims are invariably made in excess of the actual deductible amount. The home business deductions require you to utilize the area defined solely for the purpose of the business and not shared by all the household members for general living. At the same time, claiming tax deductions for your vehicle by stating that it is used 100 percent for business purposes could also make IRS contemplate auditing as in most instances, many such claims are false, especially when the person does not own a second vehicle. In the case of working at home and receiving a salary, you should remember that it should be done for the convenience of the employer and not per se for your convenience.
Math errors can also be a reason for the IRS to initiate an audit. Thus, even when you make use of computer software for calculating tax returns and for filing purposes, you should double check the values you feed to the system or else the math that you manually do in order to avoid any silly mistakes.
In addition, large claims made for business meals, travel and entertainment could also trigger a red flag while claiming for losses due to a hobby using the ‘Schedule C’ could also make you the target of an IRS audit.
When looking at the reasons that may trigger a red flag at the IRS, it becomes clear that some of these instances can be avoided by paying close attention and by double checking the information provided to the IRS. However, the best method to avoid tax audits made by the IRS is to be truthful and not to undervalue your earnings thinking that the IRS may not be in possession of the same information.