There is no situation more dreaded for taxpayers than an IRS audit. With tax season upon us many taxpayers are collecting their records and receipts and preparing to sit down with their tax professional. Which is smart, because working with a tax professional helps lower the risk of an IRS audit. However, even if you do your due diligence, sometimes something still peaks the interest of the IRS. Here are 3 scenarios that can be an IRS audit risk.
IRS Audit Risk – Don’t Draw Attention to Yourself
Nobody wants to invite an IRS audit. It is an intimidating process for many, especially if it is your first time. When it comes time to prepare and file your taxes, it is crucial that all of the information you provide to the IRS is accurate and filed on time. There are several things that run an IRS audit risk.
1- Failure to Report All Income
Failure to report all income to the IRS is more common than you might think. If you have multiple streams of income, it can be hard to keep track of all of it. This is exactly how things fall through the cracks and get left off of your taxes. The IRS typically gets sent copies of all of the tax documents you receive. So a copy of your W-2’s and 1099’s will be sent to the IRS from the issuer. This is one of the easiest IRS audit risks to avoid. It is important to make sure all income is accurately reported to the IRS to avoid raising a red flag.
2- Taking Too Many Liberties With Business Deductions
Deductions are really important for many businesses. Tax deductions work to lower a taxpayer’s taxable income through qualified expenses. This lowers the tax obligation of the taxpayer, because the less you make the less you have to pay. However, some taxpayers tax advantage of deductions, and take excessive deductions or mix a little business with pleasure. Businesses that take excessive tax deductions run the risk of inviting the IRS to take a closer look. While deductions are completely legitimate, it is a good idea to sit down with a tax advisor to go over which deductions are applicable to avoid an IRS audit risk.
3- Making Too Much or Too Little Money
Top income earners run an IRS audit risk because the more money they make the more complicated their tax returns are, and therefore likely to include errors.The most commonly audited tax bracket are taxpayers earning more than $200K. At the same token, if a taxpayer manages to significantly lower their income through tax deductions this is going to send a signal to the IRS that this taxpayer may be worth looking into.
Statute of Limitations? How Far Back Can IRS Audit
Typically the IRS has 3 years to perform an audit starting from the date the taxes were due, which is normally April 15, or the date the tax return was originally filed. However, there are a few exceptions. If substantial income was not disclosed, 25% or more, the IRS can go back as far as 6 years. There is not statute of limitations as to how far the IRS can go back if no tax return is filed, or a fraudulent tax return is filed (which is a federal offense).
How To Prevent IRS Audit
One thing taxpayers can do to reduce IRS audit risk is to keep detailed and accurate records. Keep track of all expenses, and keep copies of all receipts and transactions. Good record keeping provides insurance to the taxpayer in the event of an audit. Being able to provide a solid paper trail is the best way out of an IRS audit. It is suggested that taxpayers keep financial records for at least 3 years, it not 7.
The best way to prevent an IRS audit risk is to work with a tax advisor. This helps ensure that you taxes are filed correctly and on time. Inaccuracies often draw the attention of the IRS and can lead to penalties, restitution, or prison time. For more information or to schedule your strategy session contact Tack Hack today!