Although the IRS does not subject a large number of tax returns to an audit, they are more likely to pay close attention to your situation if they notice certain things about your return. Therefore, it is in your best interests to know what could “trip the wire” at the IRS, such that they may choose to perform an audit on your return. You should consider hiring a tax lawyer for help with your return, so you can avoid these common mistakes that may trigger increased scrutiny.
Here are five red flags that the IRS may notice that cause them to audit your return. If you are facing an audit, contact a tax lawyer at Thorgood Law Firm immediately.
Excessive Deductions
As a taxpayer, you are always told that you should maximize your deductions to minimize your tax liability to the fullest extent possible. There is a fine line between tax avoidance and tax evasion. The IRS pays close attention to the deductions and credits that you are claiming. If you do not take many deductions, there is less of a chance that your return will be audited.
There is nothing that says that you cannot and should not take every deduction that is available to you. However, if the IRS sees that you are taking too many deductions or that the amounts you are claiming are too large, they may choose to initiate an audit. The IRS often compares the deductions that you take to average amounts for similar circumstances.
They have computer programs that flag anything suspicious about your return. For example, if you are claiming excessive deductions from the sale of rental property or a large number of dependents, the IRS may want to learn more. You can avoid triggering suspicion by being careful about what deductions you take and making sure that they are fully supported.
Failure to Report All of Your Income
The IRS typically knows how much you have made in any given year. Employers and other sources of income are required to report your earnings to the IRS at the conclusion of the tax year. This process is usually automated, so the IRS has easily accessible data about the full extent of your earnings. You are expected to report and factor in all of your earnings on your tax return.
The IRS can easily flag it if you have not reported all of your earnings. You can expect, at a minimum, a letter from the IRS telling you that you owe back taxes, along with interest and additional penalties. If the IRS sees that you have underreported your income, they may ask questions about the rest of your return. They may think that there is a pattern of tax evasion, and they could then question other aspects of your tax returns, including your deductions and credits. You must be careful about reporting all your income and ensuring that you have made all calculations properly to avoid an audit.
Additionally, failure to report all of your income can attract criminal liabilities.
The Fact That You Run a Business
Whether you are a business owner or even if you have a side hustle, the IRS has many additional opportunities to be skeptical of your return. There are numerous additional tax breaks that you may qualify for as a business, but the IRS pays close attention to all of them that you may take. Businesses tend to get audited at a higher rate than individual taxpayers. If you have not paid close attention to your return, or you have been too aggressive about deductions and credits, it can spark an IRS audit. Here, the only thing in your power to keep yourself from being audited is being proactive and accurate in your tax return.
Claiming Excessive Losses
You can carry over certain losses to future years, which can help you minimize your taxes going forward. However, the IRS will pay close attention to the losses that you claim because they know it will mean that you owe less in taxes in the future. One red flag is when you claim losses that are disproportionate to your income level. The IRS is almost certain to request additional information and potentially conduct an in-depth and thorough audit. You can also expect scrutiny when you are claiming losses from multiple business ventures at one time. There is nothing that should stop you from claiming all of the losses that you have sustained, but they must all be substantiated.
Calculation Errors
The IRS has its own computer programs that calculate your taxes based on what you have reported. The agency will not take your numbers as a given. If you have made an error that causes the IRS to have to recalculate your taxes, it may cause them to question other areas of your return. You can avoid this situation by being very careful about the calculations that you make on your return. You can get even more peace of mind if you have a tax professional prepare your return for you.
You should not do anything that can raise red flags at the IRS, such that you are going to be subjected to an audit. Much of your ability to avoid an audit stems from understanding how the IRS may view your tax return and preparing ahead of time. You should seek legal advice so your business can stay in compliance with the tax laws. Furthermore, you should remain organized throughout the year by tracking and organizing your receipts and expenses, so you are prepared for tax return time.
Contact a New York Tax Lawyer Today
A New York tax lawyer at the Thorgood Law Firm can assist you with strategic advice and representation if you are facing a potential audit. You should also contact a tax lawyer well in advance of tax season, so you can be fully prepared. You can schedule a free initial consultation with one of our tax lawyers from anywhere in the United States by messaging us online or calling us today at (212) 490-0704.
