IRS Audit Red Flags to Avoid

IRS Audit Red Flags to Avoid

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Receiving an IRS audit can be a gut-wrenching experience.  The IRS is a powerful agency, and being on the wrong end of an audit can feel like you’re up against a brick wall. But it’s important to remember that you have rights, and there are things you can do to protect yourself.

The most important thing to remember is that you have the right to representation. You can hire an attorney or a certified public accountant (CPA) to represent you during an audit. This person will be your advocate and will help you navigate the often-complex tax code.

You also have the right to request a face-to-face meeting with the IRS agent who is conducting the audit. This can be a good way to get a better understanding of what the auditor is looking for. Overall, you should avoid an audit in the first place.

Everything you need to know about an IRS audit and some red flags to avoid:

What is an IRS Audit?

An IRS audit is an examination of your tax return by the IRS. The IRS can audit your return for a number of reasons, but most audits are triggered by certain red flags. For example, if you report a very high income or claim a lot of deductions, you may be more likely to be audited.

The IRS will usually notify you that you’re being audited by mail. The letter will explain why you’re being audited and will give you instructions on how to proceed.

Once you’ve been notified of an audit, the first thing you should do is seek professional help. As we mentioned earlier, you have the right to representation during an audit. An attorney or CPA can help you understand the audit process and protect your rights.

The next step is to gather all of the documentation that the IRS has requested. This may include bank statements, receipts, and other records. Once you have everything together, you’ll need to send it to the IRS or meet with the agent who is conducting the audit.

At this point, it’s up to the IRS agent to determine whether or not you owe any additional taxes. If the agent finds that you do owe taxes, you’ll be given a bill for the amount due. You’ll also be responsible for paying interest and any penalties that may apply.

If the IRS determines that you don’t owe any additional taxes, then the audit will be over. However, if the IRS thinks you owe taxes but you don’t agree, you can appeal the decision.

Overall, an IRS audit can be a stressful and time-consuming process. But if you understand your rights and follow the steps we’ve outlined here, you should be able to get through it without too much trouble.

Can an IRS Audit Be a Mistake?

IRS audits are rare, but they can happen by mistake. If you think you’ve been wrongly selected for an audit, you can request what’s called a “quality review.” This is an examination of the IRS’ procedures to make sure that they were followed correctly.

You can also ask for a second audit, called an “independent review.” This is conducted by another IRS agent who wasn’t involved in the original audit.

If you’re still not satisfied with the results of the second audit, you can appeal the decision to the Tax Court.

It’s important to remember that even if an IRS audit is a mistake, you’ll still need to go through the process and provide any requested documentation. So, it’s still a good idea to seek professional help if you’re being audited.

What Are the Odds of Being Audited?

Overall, the odds of being audited are pretty low. For example, in 2018, only about 1% of individual tax returns were audited.

However, there are some factors that can increase your chances of being audited. As previously cited, if you earn a very high income or claim a lot of deductions, you may be more likely to be audited.

Other red flags that can trigger an audit include failing to report all of your income, claiming excessive business expenses, and taking too many personal deductions.

If you’re self-employed or have rental income, you may also be more likely to be audited. This is because the IRS has found that taxpayers in these groups are more likely to underreport their income.

Of course, even if you do everything right, there’s still a chance that you could be audited. So, it’s important to be prepared for the possibility.

How Can You Avoid an Audit?

There’s no guaranteed way to avoid an audit, but there are some things you can do to minimize your chances of being selected.

First, make sure you report all of your income. The IRS receives copies of all 1099 forms and W-2s, so they’ll know if you fail to report any income.

Next, take care to claim only the deductions and credits that you’re entitled to. Don’t try to deduct expenses that you don’t have documentation for, and don’t inflate your deductions in an attempt to reduce your tax bill.

If you’re self-employed, make sure you keep good records of your income and expenses. This will make it easier to prove to the IRS that you’re not underreporting your income.

Finally, remember that filing electronically can help reduce your chances of being audited. This is because electronic filings are less likely to contain errors than paper filings.

Overall, there’s no surefire way to avoid an audit. But if you take care to report all of your income and claim only legitimate deductions, you’ll be in a better position if you are selected for an audit.

IRS Red Flags to Avoid in 2022

The best way to avoid an audit is to avoid triggering any red flags with the IRS. Here are a few things to keep in mind as you prepare your taxes:

Be Careful When Reporting High Income on a Schedule C

If you’re self-employed, you’ll need to file a Schedule C to report your business income and expenses.

One thing to be careful of is reporting too much income on your Schedule C. The IRS knows that many taxpayers are tempted to underreport their income in order to reduce their tax bill. So, if you report income that’s significantly higher than what you reported in previous years, it could trigger an audit.

To avoid this, make sure your reported income is realistic and matches up with the records you keep for your business.

Take Care When Claiming Business Expenses

Another area where self-employed taxpayers can get into trouble is claiming business expenses that are too high.

Business expenses must be “ordinary and necessary” in order to be deducted. This means that they must be common and accepted in your industry, and they must be necessary for you to run your business.

Claiming expenses that don’t meet these criteria can raise red flags with the IRS and lead to an audit. So if you’re self-employed, make sure you keep good records of your business expenses and only deduct expenses that are truly necessary.

Don’t Claim Too Many Business Losses on a Schedule C

If you’re self-employed, it’s important to be careful about claiming too many business losses on your Schedule C.

While it’s perfectly legal to deduct business losses, the IRS knows that many taxpayers try to use them to reduce their tax bills. So, if you claim a large number of business losses, it could trigger an audit.

Conclusion

No one likes the idea of being audited by the IRS. But if you take care to avoid triggering any red flags, you’ll be in a better position if you are selected for an audit.

Remember to report all of your income, claim only legitimate deductions, and keep good records of your expenses. If you do these things, you’ll be in a good position if you are audited by the IRS.

 

If you want accurate bookkeeping for your business, consider hiring a reputable accounting firm. One of the trusted accounting firms in Florida is Swiftbooks, LLC. Call 786-204-2881 today to help your business keep its financial records straight!

Further Reading

What is the Difference Between an Accountant and a CPA?

Top 12 Accounting Tips for Startup Businesses

Do Bookkeepers Need to be Licensed or Certified?

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