Auditing is every working American’s worst nightmare. The pain of tax season is hard enough with pulling data together, painstakingly entering it on forms, or hiring a professional and waiting to be sure everything is done right without the risk of an audit. Millions of individuals and families in the United States face audits each year with little to no support or explanation as to why it happened. However, as any tax professional can tell you, there are warning signs that may trigger an audit. Understanding these signs and what they mean for you can be a crucial part of surviving a dreaded audit by the Internal Revenue Service.
What Is an Audit?
When most people think of audits, they think of a full-blown IRS invasion where assets are combed over, family members spoken to, and months are spent trying to rectify the situation. However, more common are IRS notices sent to taxpayers requesting further information. This occurs when an IRS is examining a return and finds something that stands out or seems illogical. When this occurs, the IRS will send a notice to a taxpayer, explaining the deduction, exemption or entry made on a return that needs further clarification. Many individuals hire a tax accountant when this happens if they file themselves. An individual or their accountant will prepare a written response to the IRS, explaining their reasoning, providing previous tax cases with similar conclusions and providing documents in support of the position taken on the tax return. Often, these issues can be resolved easily. Although these inquiries can be the first step to a real audit, they often mean nothing. A true audit is a full examination into everything entered on a tax return with no exceptions. Audits are often very drawn out and can take several years to resolve. They involve interviews with IRS agents, an evaluation of assets and a catalog of all financial support used to prepare a return.
What Triggers an Audit?
Many individuals may feel that audits are random. This is not the case. There are several things one can do to draw attention to oneself on a tax return that will pique the interest of the IRS. Having taxable income over $10 million makes your chances of an audit far steeper. Keeping accounts offshore and not reporting them is another red flag for the IRS. Claiming large charitable donations or reporting home business losses or hobby losses on a Schedule C year after year can also attract IRS attention. Believe it or not, the tax preparer you choose can also make you more susceptible to an audit. If you choose a preparer who has a history of poor accounting choices, you may be faced with an inquiry or an audit. Making careless mistakes, miscalculating numbers, or claiming deductions in round numbers are other ways to draw the IRS’s attention. And, of course, failure to file can bring the IRS to your door.
The Easiest Way to Avoid an Audit: Be Honest
IRS audits can happen to anyone but are much more likely to happen to individuals who make mistakes, underreport income, take false deductions, or claim excessive losses. The best way to avoid an IRS audit is to be honest on your return, claim only deductions or exemptions that you can support with paperwork and be sure you have not made any errors. If you are unsure about your filing ability or do not feel comfortable with taxes, hiring a proficient, reputable tax preparer can also reduce your risk of being audited. For honest people, there is nothing to worry about. An audit may be inconvenient, but if you are reporting income and claiming only relevant deductions, there is nothing to worry about.
This article was written by Jen C. together with Richard Craft, an MBA student who looks forward to sharing his knowledge with the web, on behalf of Global Tax Services, your number one choice if you have Unfiled Tax Returns in the state of Texas.
© 2013, Jen Carrigan. All rights reserved.