An audit is simply the IRS double-checking your numbers to make sure you don’t have any discrepancies in your return. If you’re telling the truth, and the whole truth, you needn’t worry.
However, people who are consciously cheating the system do have reason to be concerned.
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The IRS conducts audits to minimize the “tax gap,” or the difference between what the IRS is owed and what the IRS actually receives. Sometimes audits are random, but the IRS often selects taxpayers based on suspicious activity.
Here are five of the biggest red flags likely to land you in the audit hot seat.
- MATH ERRORS:
When the IRS starts investigating, “oops” isn’t going to cut it. Don’t make mistakes. This applies to everyone who must file taxes. Don’t accidentally write a 3 instead of an 8. Don’t get distracted and forget to include that final zero. Mistakes happen, but make sure you double- and triple-check your numbers if you’re doing your own taxes. You’ll be hit with fines regardless of whether your mistake was intentional. If your math is a little shaky, using good tax preparation software or hiring Advance Tax Relief can help you avoid unfortunate errors.
- FAILING TO REPORT SOME INCOME
Another easy way to score an audit? Don’t report part of your income. Let’s say you’re employed herding sheep for Farmer Joe and you pick up a little extra cash writing articles for a sheep-shearing publication on a freelance basis. You may be tempted to submit only the W-2 form from your herding job and keep the freelance writing income on your Form 1099 under wraps. (Form 1099 reports the nonwage income you get from things like freelancing, stock dividends and interest.) Well, guess what? The IRS already knows about income listed on your 1099, so it’s only a matter of time before it discovers your omission.
- Reporting too many losses on a Schedule C
This one is for the self-employed. If you are your own boss, you might be tempted to hide income by filing personal expenses as business losses. But before you write off your new ski boots, consider the suspicion that too many reported losses can arouse. The IRS may begin to wonder how your business is staying afloat.
- Claiming too many business expenses
Along the same lines as reporting too many losses is reporting too many expenses. To be eligible for a deduction, purchases must be 1) ordinary and 2) necessary to your line of work. A professional artist could claim paint and paintbrushes because such items meet both requirements. A lawyer who paints for fun and doesn’t turn a profit on the works couldn’t claim art supplies as a deduction. The question to ask is: Was the purchase absolutely necessary to performing my work duties?
- Claiming a home office deduction
Home office deductions are rife with fraud. It may be tempting to give yourself undeserved deductions for expenses that don’t technically qualify. The IRS narrowly defines the home office deduction as reserved for people who use part of their home “exclusively and regularly for your trade or business.” That means a home office can qualify if you use it for work and work only. Occasionally answering emails on your laptop in front of your 72-inch flat screen TV doesn’t qualify your living room as a deductible office space. Claim a home office deduction only if you have set off a section of your home strictly for business purposes. Be honest when you report expenses and measurements.
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Mr. Dillard – CA Owed $6884, IRS settled for $400
Mr. Batiste – LA Owed $18513, IRS settled for $2972
Mr. Johnson – CA Owed $21,378, IRS settled for $4500
Ms. Gonzalez – TX Owed $28,816, IRS settled for $1700
Mr. Anthony – NY Owed $14,000, IRS settled for $900
Mr. Wilkes – CA Owed 32,211, IRS settled for $1250
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