So how do you avoid it? In some cases you can’t – the IRS chooses a very small sample of people at random to be audited. In other cases, your tax return could have been red flagged based on a number of factors.
This means as taxpayer, if you don’t want to be on the IRS radar, you’ve got to make sure you don’t make any mistakes or leave information out that could flag your return. There are several different ways you could end up on the IRS radar but here are five of the biggest reasons.
The IRS has ways of discovering income you think you slid past them. Whether it’s from the sale of a home, a side job, cash tips, bank interest income, dividend income, etc. An audit can be triggered when reported income or deductions don’t match up with your W2s, 1099s, or 1098s.
Here’s the bottom line: if you earned money, you need to report it. All of it.
Be careful with your deductions. There are a lot of rules surrounding what can and cannot be deducted. Unreimbursed employee expenses, charitable contributions, mileage… If you have an unusual amount of itemized deductions compared to your income level, your return could be flagged by the IRS. If your deductions are legitimate, make sure you have documentation for each of them.
Another item that the IRS scrutinizes is the valuation of donated items. Don’t overestimate what your items are worth, make sure you are deducting what the fair market value of the used items would be. For more info, you can check out the IRS publication on determining fair market value.
Foreign Bank Accounts
You can hide money in foreign bank accounts… but not from the IRS. According to the Bank Secrecy Act, you are required to report any foreign financial accounts you have a financial interest in or signature authority over. This includes brokerage accounts, mutual funds, and trusts.
Mixing Business and Personal Expenses
For freelancers, small business owners, and the self-employed, mixing personal and business expenses can be one of the biggest mistakes made. It’s very important to keep your bank accounts separate and make sure that all business expenses are paid from your business account.
Who You Claim As A Dependent
One thing that immediately catches the IRS’s attention is when two people claim the same dependent. Only the custodial parent is allowed the dependency deduction. The custodial parent must complete Form 8332 in order to allow the noncustodial parent to claim the deduction.
You should also make sure that the dependents you claim are legitimate in the IRS’s eyes and that your dependent does not claim himself or herself on his or her individual tax return. While you can claim other family members that you support who are not your children, there are guidelines you must follow.
Your Rights As A Tax Preparer
If you do happen to be audited, you have rights as a taxpayer. These rights include:
- A right to professional and courteous treatment by IRS employees.
- A right to privacy and confidentiality about tax matters.
- A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
- A right to representation, by oneself or an authorized representative.
- A right to appeal disagreements, both within the IRS and before the courts.
Believe it or not it is easy to make these mistakes when self-preparing. Choosing a professional tax preparer can help you avoid sending red flags to the IRS. In the event that you are audited, only an Enrolled Agent, CPA or Attorney can represent you in front of the IRS. At People’s Tax, we offer a Triple Guarantee:
- Year Round Assistance – in the event that you receive a letter from the IRS
- Accuracy through double-checking – we have a second preparer double check every tax return we file to insure that it is accurate
- Satisfaction – if you are unsatisfied with the service you received, and you choose not to file the tax return we prepared for you, we will refund your preparation fees.