What is an Audit by the IRS?
The IRS website defines an audit as “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.” The IRS conducts audits in an effort to minimize the tax gap — the difference between what the IRS is owed and what the IRS actually receives.
Selection for an audit doesn’t immediately mean there is a concern. The IRS chooses accounts based on random selection and computerized screening that compares your tax return to the “norms” of similar returns. The IRS may also choose to audit you if you do business with another taxpayer being audited.
What are some IRS Audit Red Flags?
When finalizing your taxes, you’ll want to have proper documentation for your valid deductions. Avoid these IRS red flags on your tax return that may increase your chances for an audit.
Unreported nonwage income
If you have a salary income but decide to pick up a freelance gig for a bit of extra pocket change, you will need to report your earnings on your Form 1099 along with your regular W-2. Failing to report part of your income is the one of the biggest red flags for an IRS audit.
Mistakes happen, but even a small mix-up within your calculations could merit an audit. Triple check your numbers before submitting your tax return. An unintentional mistake could lead to hefty fines. Worried about your math skills? Prepare your taxes with the help of an accountant.
Claiming too many charitable donations
The IRS can sense where your comfort level would be with charitable donations based on your salary. If your deductions are higher than average, the IRS will want to investigate further. Be sure to save your receipts and proof of charitable contributions to prove that you really are that generous.
Questionable business expenses
The IRS is strict about not mixing business expenses with personal expenses. A valid business expense must be both ordinary and necessary to your line of work. A chef could write off new utensils during a kitchen update. But a lawyer with an affinity for baking cupcakes couldn’t claim a stand mixer as a business expense.
Home office deduction
Writing off your home office can be a major pro to owning a business. But the IRS won't accept your kitchen table or living room couch as a home office. For a valid home office deduction, the office needs to be a space in your home solely dedicated to your business operation.
Hire a CPA during an IRS Tax Audit Representation
If you’ve received an audit notice from the IRS, don’t go through it alone. Having a CPA represent you is the best way to get tax audit help. The IRS will then communicate with the CPA, and the CPA will ensure that the audit is efficiently handled. Contact Watson CPA today for a free consultation and to accurately prepare your taxes.