9 Irs Red Flags To Watch Out For!
An IRS audit might seem like a rarity, but it's not wise to get complacent with taxes. In 2019, 771,095 tax returns were audited. With audits being such a common experience, particularly when it comes to corporations filing, it's important to be careful when filing. Taxes aren't easy, and even unintentional mistakes can be seen as a misrepresentation of finances.
One of the most important things you can make yourself aware of, is the list of common IRS red flags. Often, these things will be used to trigger audits and a closer look at the taxes filed. Take your time with your taxes, and avoid getting the attention of the IRS by throwing up these red flags.
1. Reported Income Doesn't Match
The IRS gets its information in a whole bunch of different ways, and it's not always directly from you. 1099 MISCs are sent from businesses, not just independent contractors, and other forms can come from a variety of sources. If the income you've reported doesn't match what someone else is telling the IRS they've paid you, prepare for some red flags to be raised.
2. Large Charity Donations
Charitable donations aren't bad within themselves. Actually, they're very generous. However, if your charitable donation doesn't seem in line with your income or the business' income, this could raise a red flag. For IRS audit red flags, computer programs are often run automatically and one thing they will flag up is a sizeable charitable donation.
It's one of the sure ways to draw the IRS' eyes to you. This isn't to say you shouldn't donate money to charity! Just do so within your means, and keep the receipts.
3. Taking Higher-Than-Average Deductions
If you're looking for how to avoid an IRS audit, the most solid piece of advice is not to take higher-than-average deductions. The IRS can see what the business or individual does and if the deductions are wildly far from the average, they might start to look into this. Is it legitimate, or is something being reported inaccurately?
Make sure you keep a list of your deductions with receipts. That way, if investigated, you can back yourself up.
4. Deducting Expenses That Don't Count for Business Purposes
It might not be that you're taking too many deductions. It could be that the IRS doesn't see the deductions you're taking as legitimate. Too many meals and nights out might start to be seen as personal, whether they were intended to revolve around business or not. Make sure any food, etc., that you claim a deduction for is legitimate so that you can explain to the IRS if necessary.
5. Claiming A Vehicle Or Home Space Is 100% Business Use
While an office space might be fully business-oriented, a home space is unlikely to be — as is a personally owned vehicle. Independent contractors often write off vehicles and home offices as deductible expenses, but that's not the correct way to do it. You should calculate how much of the vehicle or space is used for business, and only count that as a deduction.
6. Cash Transactions
Cash transactions are one of the biggest red flags for an IRS audit, and it's easy to see why. It's difficult to keep track of a cash transaction. For money moving from one bank to another, there's always a digital footprint. For cash, it can be passed from hand-to-hand and it's very difficult to prove or disprove how much was involved.
If your business is involved in making cash transactions, keep an accurate record.
7. Foreign Bank Accounts
Many people are mistakenly under the idea that a foreign bank account means that no tax has to be paid from it to the IRS. This is not true. If you're living in the USA, any income needs to be reported to the IRS, even if it's not going into a bank account here. Getting income into a foreign account doesn't get you out of paying taxes to the United States of America.
8. Large, Abrupt Changes Year-To-Year
It's normal for a business or contractor to grow and fluctuate. Some years might be bad for income and others might be great. The IRS is used to this ebb and flow. What's not normal and raises red flags for taxes, is if the change is large, abrupt, and unexplained. For example, a business' income dramatically decreasing one year with no explanation might mean that the business is underreporting so they can get away with paying less tax. Much higher expenses might mean the same thing.
If you do have a large difference from one year to the next, it might be worth explaining as best you can in the tax forms to ensure it doesn't result in a stressful audit.
9. Many Mathematical Errors
Taxes are difficult, and many people's brains aren't geared around math. The odd mistake can be easily brushed off, but for some, the mistakes are plentiful and this will get the IRS's attention fast. Try to be careful when filling out your forms. Double-check everything, because if the mistakes begin to pile up, it can start to look as if you might be misrepresenting income deliberately.
The IRS is also much more likely to be forgiving of a freelancer with no math qualifications than a large corporation with professional accountants at their disposal. Sometimes context matters!
Avoid IRS Red Flags For A Smooth Sailing Journey!
Ultimately it comes down to avoiding common IRS red flags and ensuring all of your paperwork is double-checked. Take the time to go through it and eliminate any errors or red flags you may have missed. Audits can be a stressful time, and they're the last thing you need on your plate! Keeping track of your income is fairly easy.
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