The Internal Revenue Service (IRS) is responsible for upholding federal tax laws and ensuring that individuals and businesses comply with them. One way the IRS carries out this duty is by conducting audits to verify that taxpayers have accurately reported their income, expenses, and other tax-related information. While the thought of an audit can be intimidating and stressful, it’s crucial to know that it’s a standard part of the tax process and can occur for various reasons.
An audit does not automatically indicate wrongdoing on your part. Many audits are either random or based on specific criteria that the IRS uses to identify potential issues. Understanding the triggers for IRS audits and how to avoid them can help lower your risk and ensure your tax return is precise and compliant with tax laws.
Keep reading to learn about the most common causes of IRS audits and effective strategies to minimize the likelihood of one.
What Are Common Causes for IRS Audits?
IRS can initiate an audit for various reasons. Some of these include:
Inconsistencies in Tax Returns
One of the most common causes of IRS audits is inconsistencies in your tax return. This can include large deductions, unreported income, or inconsistent information from year to year. To avoid inconsistencies, keep accurate records of your income, expenses, and other tax-related information. You should also double-check your tax return before you file it.
Another common cause of IRS audits is having a high income. If your income is significantly higher than others in your tax bracket, you’ll be more likely to be audited. To avoid being audited for having a high income, it’s important to accurately report your income and keep records of your expenses to support any deductions you claim.
Certain deductions, such as home office expenses or charitable contributions, may be more likely to trigger an audit. To avoid being audited for these deductions, keep accurate records and follow the guidelines set by the IRS. For example, if you claim a home office deduction, you should make sure that you have a dedicated workspace in your home that you use exclusively for business purposes.
Failure to Report All Income
If you fail to report all of your income, you increase your chances of being audited. Make sure you accurately report all of your income, including any freelance work, tips, or other forms of income.
Using round numbers on your tax return, such as claiming exactly $10,000 in deductions, can trigger an audit. Use actual numbers instead of rounded figures, and keep accurate records to support your claims.
Gathering Support Documentation
A key aspect of avoiding an IRS audit and ensuring compliance with tax laws is gathering all necessary documentation to support your claims. This documentation serves as evidence for the information you have provided on your tax return and can help you defend yourself in the case of an audit. Some of the types of documentation you should have on hand include receipts, invoices, bank statements, and other records that support your income and expenses.
Keeping accurate and organized records will not only help you avoid an audit, but it will also make the audit process much easier if you are selected. In order to avoid missing any important documents, it’s best to keep all of your tax-related information in a single, organized location.
How to Avoid an IRS Audit
The best way to avoid an IRS audit is to ensure that your tax return is accurate and compliant with tax laws. To achieve this, there are several steps you can take:
A. Accurate Record-Keeping: Maintaining accurate and detailed records of your income and expenses is crucial to avoiding an audit. Make sure you have receipts, invoices, and other supporting documentation for all of your deductions.
B. Be Truthful: Always be truthful when reporting your income and expenses on your tax return. Falsifying information on your tax return can result in severe penalties, including fines and even imprisonment.
C. Consult with a Tax Professional: Consider consulting with a tax professional, such as an accountant or tax attorney, to ensure that your tax return is accurate and compliant with tax laws.
D. Review Your Return Before Filing: Before you file your tax return, review it thoroughly to ensure that all of the information is accurate. If you find any errors or discrepancies, make the necessary corrections before filing.
By taking these steps, you can reduce your risk of being audited and ensure that your tax return is accurate and compliant with tax laws.
By keeping accurate records, double-checking your tax return, and accurately reporting all of your income, you can reduce your chances of being audited. If you are selected for an audit, it’s important to stay organized and well-prepared. If you are unsure of how to proceed, consider reaching out to a tax professional for assistance.
At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.Interested in learning more? Read on to learn how to respond to an IRS audit.