5 Top Triggers That Will Increase Your Chance of an IRS Tax Audit

Audit word under magnifying glassWith another tax season fast approaching, it’s common for individuals taxpayers to start thinking about their chances of an IRS audit, especially when a tax situation is complex. A taxpayer has a higher chance of avoiding an IRS audit by following proper account filing instructions from the start. Unfortunately, the IRS does not publicly share a list of common mistakes taxpayers can avoid. If you are not a chartered accountant, it is best to hire a CPA that has experience in complying with tax laws to keep your chances of an audit low.

The next time you start preparing your tax return, we recommend that you consider our helpful advice to ensure an accurate submission.

What Are the Odds of Getting Audited on Your Taxes?

Getting an IRS tax audit notification is not all that common among individual taxpayers, as it is more likely with those who include business income – or losses – when they file. That doesn’t mean individuals cannot receive an audit, however. In either case, the first step to ensuring your tax submission is accurate and therefore less likely to be selected for an audit is to file taxes with integrity, no matter how much money you earn.

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According to Forbes, “As you begin to recognize substantial business income, even if your total income remains below $200,000, your percentage likelihood of enduring an examination jumps from less than 1% to over 3.5%.” While lower income means your chances of an audit are reduced, it does not guarantee that you will not receive a request for an audit. The simple truth is the more income you earn, the higher chance an audit will happen.

Risk Factors That May Trigger an Audit

After completing careful research, we’ve included a list of items to review before you or your accountant submits tax forms for the year:

1. Self Employment Expenses

The way it works is auditors understand the average entrepreneur’s earnings based on their industry, number of employees, and annual calculated income. A red flag will appear in the IRS system if the exemption is higher than the average. It is essential that all small to large organizations keep accurate records, receipts and documentation to prove annual expenses.

2. Questionable Donations

As a taxpayer, you are entitled to deduct a fee towards a charitable donation. However, taking advantage of the benefit to lower your taxes is a risk. It is common for a business to be audited if a large donation is reported compared to previous years, when the company was not actively donating to charities.

3. Deducting the Wrong Business Moving Expenses

If you need to move your business to a new location, there are several expenses you cannot report:

  • Meals for personal moving expenses related to the business move
  • Personal moving expenses at your place of residence relating to the business move
  • Personal losses cannot be reported if you relocated to your new area of business after 12 months of the official move date

However, there are some business moving expenses you can report for tax deductions. The following rules apply:

  • Your new place of business needs to be a minimum of 50 km from the old location
  • A full-time business owner working at least 39 weeks in the first 12 months of the fiscal business year

We highly recommend that you discuss additional requirements for your taxes with a qualified tax professional because this criterion varies from state to state.

4. A Deduction for a Hobby

If you have a hobby that is business-related such as golf, you can deduct expenses only from the amount of income generated from the hobby. Reporting a loss from a hobby (non-business related) will further increase your chances of being audited.

The goal is to deduct only hobbies that are conducted primarily to earn a profit. Most importantly, you will need to have all documentation on file for reference.

5. Foreign Bank Accounts

The mindset that foreign accounts are of high interest to the IRS is one you should not take lightly. In some countries, including the Bahamas and Barbados, which are considered tax havens, banks have relationships with the United States and IRS where they will report misconduct for auditing purposes.

It is important to disclose all foreign business accounts because the IRS has been known to collect billions of dollars through amnesty programs from entrepreneurs that receive a reduced penalty for false documentation after their taxes were submitted.

With these tips in mind, you can reduce your risk of getting audited. However, the best way to reduce your risk is by ensuring that your tax filings are accurate and on time. It is your responsibility as a business owner to be forthcoming with your finances, no matter how simple or complex they may be. Think of the IRS as your best friend that has your best interest as a taxpayer in mind. The more transparent you are with the organization, the less stress, time, money and energy you need to spend to do the right thing.

Larry L. Bertsch, CPA & Associates, a top CPA and small business accounting firm, has been offering quality accounting and tax preparation services to entire Las Vegas market since 2003.

Posted on January 12, 2018 by in Personal Finance

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