So what is an IRS Audit?
Usually you hear the term audit and you cringe at the thought. If it isn’t part of some TV sitcom punchline, you want no part of it. Audits can be brutal or they can just be a necessary nuisance. So here is what an IRS audit entails. An IRS audit constitutes a thorough assessment of your financial records and data to validate the accuracy of your tax reporting, ensuring compliance with pertinent tax regulations, and verifying the accuracy of your reported tax liabilities. Put simply, it entails a meticulous review by the IRS to ascertain the consistency and integrity of your tax filings, aiming to detect any potential discrepancies or irregularities.
State tax authorities may also initiate audits in certain cases. If your disclosures are truthful and comprehensive, there’s no cause for undue apprehension. An IRS or state audit, in essence, is not inherently malevolent. However, individuals engaged in deliberate tax evasion or fraudulent practices should be duly concerned about the implications of such audits.
Why does the IRS Audit people?
The IRS undertakes tax audits with the objective of mitigating the “tax gap,” which denotes the variance between the amount of taxes owed to the IRS and the amount actually collected. Occasionally, tax returns are chosen for audit randomly, as stated by the agency. However, audits may also be prompted when a tax return is associated with transactions featured in another audited return, such as those involving investors or business partners.
Moreover, the IRS frequently targets taxpayers based on suspicious financial activities. This approach aims to identify and address instances of potential tax evasion or fraudulent behavior, thereby ensuring the integrity and fairness of the tax system.
What are some IRS Audit triggers?
1. Making 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 a tax preparer near you can help you avoid unfortunate errors that can lead to an IRS audit.
2. Failing to report some income:
Easy way to score an IRS audit? Don’t report part of your income.
Let’s say you’re employed by a digital marketer named Jim and you pick up a little extra cash writing articles for one of Jim’s clients on a freelance basis. You may be tempted to submit only the W-2 form from your digital marketing job and keep the freelance writing income on your Form 1099 under wraps.
A 1099 reports nonwage income from things such as freelancing, stock dividends and interest. One type of 1099, the 1099-NEC, typically reports amounts paid to independent contractors.
Well, guess what? The IRS already knows about income listed on your 1099 because the publication sent it a copy, so it’s only a matter of time before it discovers your omission.
3. Claiming too many charitable donations:
If you made significant contributions to charity, you’re eligible for some well-deserved deductions. This bit of advice is common sense: Don’t report false donations. If you don’t have the proper documentation to prove the validity of your contribution, don’t claim it. Pretty simple. Claiming $9,000 in charitable deductions on your $38,000 salary is likely to raise some eyebrows.
4. Neat round numbers:
It’s super important to maintain precision when reporting figures on tax forms such as the 1040. Guess what? Typically, amounts recorded on tax documents do not align neatly with round intervals of $100. Therefore, it’s essential to conduct calculations meticulously, avoiding estimations wherever possible. Aim to round figures to the nearest dollar rather than rounding to the nearest hundred.
For instance, suppose you’re a videographer claiming a $795.25 lens as a legitimate business expense. It’s advisable to round this figure to $795, rather than to $800. An even $800 may raise suspicion, prompting the IRS to request additional documentation or proof. Not worth the risk for the $4.75 added deduction. By adhering to precise rounding practices, you can ensure accuracy and minimize the risk of triggering scrutiny during tax audits.
In the end, you will lead a much happier life if you do the right thing and not try to cheat the IRS. Don’t forget as a taxpayer you have rights. Refer to our previous blog on Taxpayer rights.
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