Five “Red Flags” That May Lead to an IRS Audit

There are few things that most Americans fear more than an IRS audit, and with good reason. The IRS audit process is a mystery to many people, but the reality is there are some things that can increase the likelihood of being chosen for an audit. Sometimes there is nothing you can do to avoid raising these “red flags”, but in many cases there is. Take a moment to learn about five major issues that can cause you to get audited:

Mistakes on Your Tax Returns

One of the biggest causes of an IRS audit is a mistake on your returns. Even if the mistake was entirely unintentional, like typing in the wrong Social Security Number or making an inaccurate calculation, this type of mistake can catch the attention of the IRS. This is why it is so important to double check every line when filing any tax forms.

High Income

Having a high income is something most people wish for, but one downside to making $200,000 per year or more is that you face an increased chance of being audited. Those making more than $200k have a 1-in-27 chance of being audited, with that percentage going up as your income grows. There isn’t much you can do to avoid this, but it is good to be aware of.

High Levels of Charitable Giving

Giving money to charity is a good thing, and will often earn you valuable tax credits. But if your giving is significantly higher than the IRS expects to see for someone at your income level, you are far more likely to get audited. So be sure to document your giving carefully!

Owning a Small Business

Small business owners are often subject to audits at a higher frequency than traditional employees. This is especially true for businesses that operate primarily in cash, such as taxi drivers or hair salon owners. Another thing small business owners often do to further raise their risk is claiming a deduction for a home office. This is a common “red flag” that gets people audited. Of course, if you are entitled to the deduction, it is well worth the hassle of the occasional audit to get the deduction… as long as you’re properly documenting it.

Not Reporting All Income

You are required to report all the income that is on any 1099 or W-2 form. The IRS is already aware of this income, so if they don’t see it on your return, you are likely to get audited so they can figure out why it wasn’t there. In most cases, it will mean you have to amend your return and pay the taxes that you had avoided.

Nobody wants to be audited by the IRS. But if you are facing an audit, don’t panic! With an experienced tax attorney on your team, the process doesn’t have to be a nightmare. Please contact us today to learn more!

Written by E. Morgan Maxwell

E. Morgan Maxwell

Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.

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