February 29, 2016

44701677_sAn IRS tax audit occurs when the agency wishes to double-check the numbers on your tax return to ensure there are no discrepancies. Audits are usually conducted to minimize the difference between what the IRS is owed versus what the IRS actually receives.

While it is possible for you to randomly be flagged for an audit, there are often good reasons why the IRS selected you for a tax audit. Some of those reasons could be:

You did the math wrong.

The IRS is likely to notice if the figures on your forms don’t add up or match, so do your absolute best to ensure there are no mistakes on your tax return. Double-check and triple-check your numbers, or seek help from a tax professional to make sure you’re doing everything right.

There was a major change in your income.

You may be flagged for an audit if you made a lot less money last year, as it could signify that you are underreporting earnings. Keep in mind that the IRS keeps track of historic data, and so the agency may want to take a closer look at your tax return.

You claimed too many charitable donations.

Significant charitable contributions can translate to significant deductions. However, the IRS is likely to flag you down if your large amount of charitable deductions does not match the amount of your annual salary. Don’t claim charitable contributions if you are unable to present all the necessary receipts and records of donations to prove that your contributions are valid.

You amended your tax return.

It is common for amended returns to be flagged for audit, particularly if the information involves increasing deductions in areas such as meals, entertainment, travel, and automobile expenses. If you are amending your tax return, be sure to substantiate all income and deductions to avoid being flagged.

You are self-employed.

As unfair as it may seem, being self-employed can raise a number of red flags with the IRS. You may be flagged for an audit, for example, if you don’t earn much income but claim home office deductions. In order to qualify for home office deductions, remember that your home office must be used solely for work. Be prepared to defend deductions and credits you take with the appropriate paperwork.

You maintain an offshore bank account.

 While it may not be considered illegal for you to have overseas bank accounts, it is illegal to fail to declare them or their income. Review your records carefully, because failing to report one offshore account is likely to trigger an audit.

You are part of a specific market segment.

 The IRS selects a specific industry for compliance examinations every year based on suspected abuse hot spots. For example, in one year, the IRS focused on unreported tip income and therefore examined servers in restaurants. Depending on the industry you work in, you may be selected for a tax audit.

Categories: Blog, IRS, Tax Tips, Taxpayers' Rights