As the tax season begins, the last thing you, as a taxpayer, want is an IRS (Internal Revenue Service) audit. The thought of having your tax returns scrutinized by the IRS can be daunting, not to mention the potential fines and penalties that could result from any errors or discrepancies found. Fortunately, there are steps you can take to minimize your chances of being audited.
In this blog, we will explore some strategies that can help keep your tax returns off the audit radar. From understanding the red flags that can trigger IRS audits to maintaining accurate and organized records, we will provide practical tips to help you avoid the stress and expense of an audit.
Whether you’re an individual taxpayer or a business owner, the importance of avoiding an audit cannot be overstated. By taking a proactive approach and implementing the right strategies, you can minimize your risk and ensure that your tax return is in compliance with IRS regulations. So, let’s dive in and learn how to stay off the audit radar.
Top IRS audit triggers: 8 tax mistakes to avoid
There are several common triggers that may increase your chances of being audited by the IRS. By avoiding these triggers, you can reduce your risk of being audited. Here are some of the most common triggers to avoid:
#1 Failing to Report All Income
This includes income from sources such as self-employment, rental income, and investment money.
- Know what counts as taxable income: Income can come from many sources, including wages, tips, income as self-employed individuals, rental income, investment income, and more. It is important to show all income, no matter how small, on your tax return.
- Use all tax documents: Your employer or clients will send you tax documents such as W-2s, 1099s, and other income statements. Make sure to use all of these tax documents to show all income on your return. If you are missing a tax document, contact the issuer to obtain a copy.
- Keep accurate records: Keeping meticulous records is key to reporting all income on your tax return. If you have a business, keep track of all income and expenses. If you receive rental income, keep track of rental payments and expenses. Accurate records will help ensure that you show all income on your tax return.
#2 Claiming Large Charitable Deductions
Claiming a large charitable deduction can also be a red flag for the IRS. If you plan to claim a large charitable deduction, make sure you have proper documentation to support your claim. Here are some things to keep in mind:
- Know what qualifies as a charitable contribution: To claim charitable tax deductions, you must donate to a qualified organization. These organizations include religious, educational, and charitable organizations, as well as certain other types of organizations. Make sure that the organization you are donating to is eligible for a deduction.
- Keep accurate records: It is important to keep accurate records of all charitable donations. This includes receipts or other documentation from the organization you donated to, as well as records of any non-cash donations you made. Make sure that your records are complete and up-to-date.
- Follow IRS guidelines: The IRS has specific guidelines for claiming charitable deductions. For example, if you donate property worth more than $500, you must file Form 8283. Make sure that you understand and follow these guidelines to avoid any issues with the IRS.
#3 Claiming Business Losses
Claiming business losses year after year can also increase your chances of being audited. If you have a business that consistently generates losses, you may want to consider restructuring or closing the business to avoid raising red flags with the IRS.
- Know the rules: The IRS has specific rules regarding business losses. For example, you must be able to prove that you are operating a business and not just engaging in a hobby. Make sure that you understand these rules before claiming business losses.
- Keep accurate records: It is important to keep accurate records of all business-related expenses and losses. This includes receipts, invoices, and other documents. Make sure that your records are complete and up-to-date.
- Show a profit motive: The IRS may scrutinize your business losses if they believe that you are not operating your business with the intention of making a profit. Make sure that you can show a profit motive for your business.
#4 Claiming Excessive Home Office Deductions
Claiming excessive deductions for the home office can also trigger an audit. If you work from home, make sure you are only claiming deductions for the portion of your home that is used exclusively for business purposes.
- Know the rules: The IRS has specific rules regarding home office deductions. For example, your home office must be used regularly and exclusively for business purposes. Make sure that you understand these rules before claiming a home office deduction.
- Calculate your deduction accurately: To claim a home office deduction, you must calculate the percentage of your home that is used for business purposes. This includes the square footage of your home office compared to the total square footage of your home. Make sure that you calculate this percentage accurately.
- Be realistic: It is important to be realistic when claiming a home office deduction. If your home office is only used for a few hours a week, it may be difficult to justify claiming a large deduction. Make sure that your deduction is reasonable and consistent with your business activities.
#5 Making Large Cash Deposits
Making large cash transactions or deposits into your bank account can also raise red flags with the IRS. If you do make a large cash deposit, make sure you have proper documents to support the source of the funds.
- Report all income: It is important to file all of your income on your tax return, including any cash transactions. Unreported income could raise red flags with the IRS and trigger an audit.
- Consider alternative payment methods: Consider using alternative payment methods, such as checks or electronic transfers, instead of cash.
#6 Failing to Report Foreign Assets
If you have foreign assets or income, failing to report this on your tax return can also put you on the IRS radar. Make sure you are properly reporting all foreign assets and income on your tax return to avoid potential issues with the IRS.
- Understand the reporting requirements: If you have foreign assets, you may be required to file a Report of Foreign Bank and Financial Accounts (FBAR) or other tax forms with the IRS. Make sure that you understand the reporting requirements and file all required forms.
- Report all income: If you have foreign assets that generate income, you must report that income on your tax return. Failure to report all of your income could raise red flags with the IRS and put you on the audit radar.
#7 Claiming Hobbies as Businesses
If you are engaged in an activity that you enjoy and that also generates income, it may be tempting to claim it as a business to take advantage of the tax benefits. However, the IRS has strict guidelines on what qualifies as a business. Claiming a hobby as a business can trigger an audit. Here are some tips to avoid this mistake:
- Understand the difference between a hobby and a business: A hobby is an activity that you engage in primarily for pleasure, while a business is an activity that you engage in primarily to make a profit. To be classified as a business by the IRS, you must be engaged in the activity with the intention of making a profit.
- Be prepared to prove your profit motive: If you are claiming an activity as a business, you must be able to demonstrate that you are actively working to make a profit. This includes things like developing a business plan, marketing your products or services, and keeping up with industry trends.
#8 Claiming the Earned Income Tax Credit (EITC)
The EITC is a tax credit designed to help low-to-moderate-income individuals and families. However, the eligibility requirements for the EITC can be complex, and claiming the credit incorrectly can result in an audit. Here are some tips to help you avoid this mistake:
- Understand the eligibility requirements: To claim the EITC, you must meet certain eligibility requirements, including income limits and filing status. You must also have earned income from employment or self-employment.
- Provide accurate information: Provide accurate information about your income, filing status, and dependents. Make sure that you have all of the necessary documentation to support your claim, including pay stubs, W-2s, and other income statements.
- Use the correct filing status: Make sure that you are using the correct filing status when claiming the credit. For example, if you are a single parent with a dependent child, you may be eligible for the EITC if you file as Head of Household.
- Avoid common errors: These include claiming a child who does not meet the residency or age requirements, or claiming the credit for a child who is not your dependent.
Key Takeaways
If you need assistance with your taxes, it’s always best to seek help from a reputable agency like GNS Certified Public Accountants. Their team of experienced professionals can provide guidance on tax planning, preparation, and compliance for individuals and businesses.
Contact GNS CPA today to learn how they can help you navigate the complexities of claiming deductions and credits and avoid potential IRS audits.
