Tax season can be an intimidating and stressful period for many. The demands of organizing and itemizing everything before the deadline can get mentally exhausting. What’s even more daunting is the thought of being audited by the IRS. Though your chances of an audit are low, it remains a potential issue every taxpayer needs to bear in mind.
In 2016, a total of 1 million taxpayers faced an audit by the IRS.
An audit is a thorough examination of your personal or business financial records by the IRS to verify the accuracy of your tax return. It’s a meticulous process that involves you and the IRS closely scrutinizing your financial and tax records.
The IRS requires your financial documents, and it may be necessary to engage a lawyer or tax professional to assist with the process. Following this, you may have to correct your tax returns, or even end up owing more money to the IRS.
Avoiding an audit is certainly desirable due to its stressful nature. The IRS might randomly select individuals for an audit, whereas certain actions during your tax filing could also trigger an audit.
Here are five tax filing errors you should avoid to prevent an audit:
1. AVOIDABLE MISTAKES
While filing your taxes, carefulness and precision are key. It’s important to thoroughly review your tax documents before submitting them to the IRS. Even if you enlist a professional to file your taxes, personally reviewing the details such as basic calculations, social security numbers, and addresses can prevent unnecessary errors. If your tax situation is complicated, it might be helpful to hire a trustworthy tax expert to handle everything correctly.
2. OMITTED INCOME
One tax-related mistake that can prompt an IRS audit is not mentioning all income sources. The IRS cross-references your data with the information submitted by your employers or companies via W-2 and 1099 forms. If those data sets don’t align, it could lead to an audit. Ensure to report all income, including prize money and royalties. It could be challenging to manage multiple income sources, which can be organized more effectively with a weekly or monthly income tracking spreadsheet.
3. UNCLEAR DEDUCTIONS
Deductions can significantly reduce your taxable income if used accurately. It’s crucial to be updated on the tax code and conscientiously deduct only the permissible expenses. Keep track of expenses and income to prevent complications.
4. EXCESSIVE CHARITABLE DONATIONS
Claiming a large number of deductions for charitable donations could also raise red flags. The IRS knows the average donation amount for each income level. Keeping track of your donations and being realistic avoids suspicion.
5. CONTINUING LOSSES IN A HOBBY BUSINESS
Businesses are expected to be profitable. If you report a loss in your side business continuously for three out of five years, the IRS might consider it a hobby rather than a business, disallowing any business deductions and potentially leading to an audit.
IF AUDITED…
In case you are audited, stay calm. The auditor might suggest corrections, which might mean paying more money in certain cases. You can either agree to make the changes suggested by the IRS or contest if you believe they’re in error. Hiring a tax professional could be helpful in either case, but a lawyer would be more suitable if you are disputing the IRS’s claims. Be patient, as the process could take a few months. Ensure accurate paperwork and prompt responses to manage the situation effectively and arrive at a solution quickly.
Have you ever faced an audit? What are your strategies for avoiding an audit?
