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Possible Red Flags That May Trigger A Tax Audit

May 12, 2020

The last thing that anyone wants to receive is a dreaded notice that you are getting audited. It can be nerve-wracking, but at the end of the day, an audit is simply an in-depth fact-checking exercise. Although enduring an audit can be time-consuming and inconvenient, you shouldn’t have anything to fret about if you’ve been honest and accurate when keeping records and filing tax returns. While the IRS says that an audit is generally random it is worth the effort to avoid red flags.

Possible Red Flags That May Trigger A Tax Audit

Failure To Report. Failing to report any portion of your income is a possible way to invite an IRS audit. It can be enticing to omit information from your returns, but if you received a Form 1099, or W2 you can rest assured the IRS received a copy as well and knows about this income. Even if you don’t receive an official income form for work you did, you should still let the IRS know about it. You are required to report it and pay taxes on it If your income (after expenses) from a side job is at least $400.
Excessive Losses. Individuals who are self-employed and report too many losses on a Schedule C may easily attract the attention of the IRS, who may read this as an attempt to hide your income. This is particularly true if you report losses while your business appears otherwise stable. Don’t write off impractical items, and make the effort and be honest to avoid a red flag.
Simple Mistakes. It may truly be an honest mistake, but if something looks odd, such as an incorrect Social Security number or calculations that don't add up, you may bring on additional scrutiny from the IRS. Be careful and check your work twice when filing taxes. What was just an oversight can be a costly mistake.
The Use Of Round Numbers. While it’s within the realm of possibility to have your tax return is accurately filled with tidy, round numbers, these clean intervals will make the IRS do a double-take. Even numbers are rare in finance and may invite suspicion. It may seem easier to just round the numbers but being precise is worth the effort.
Charitable Donations. Even though the IRS believes in charity, they do have their limits. If you’re claiming too many charitable donations on your annual returns, especially in relation to your income, the IRS is sure to notice. Make sure you can validate your contributions, and see that your income-to-donation ratio looks reasonable.
Unusual Business Deductions. You are entitled to a number of tax deductions, as a business owner, that ordinary taxpayers aren’t. You can deduct things like office supplies, business travel expenses, and even certain meals. However, there are a host of other business expenses that are questionable when it comes to taking a deduction. For example, except under specific circumstances, you probably can’t deduct tickets to entertainment events, donations from which you personally benefit, commuting expenses, or all those generous cash tips you gave to hotel housekeeping during the year.

The Takeaway

An audit can be a strenuous process that creates stress, frustration, and potential losses. Always take your tax returns very seriously and be mindful of tracking your personal and business expenses and income throughout the year. When you do this, filing your returns will be more straightforward for both you and your CPA and you can be confident that the information on your returns is correct to the best of your knowledge.

Contact us today, at Cartier CPA's our goal is to provide clients with the highest level of respect and quality of service.

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