Reasons the IRS will audit you are essential for every American tax payer. It might however, surprise you to know that only around 1% of all tax returns are subject to an IRS audit each year due to the fact that the IRS simply doesn’t have enough time or resources to audit everybody. An IRS audit is nothing to worry about for an honest citizen – the only reason you have to worry is if your taxes are filed incorrectly. There are various things that determine the likelihood of being audited by the IRS: your income level, business and foreign assets being just three examples of possible reasons. Read on for my list of 8 Reasons the IRS Will Audit You:
1. High Income Level
The chances of being subject to an IRS audit increases dramatically for those earning over $200,000 per year. The odds of being selected for lower income citizens is just over 1%, whereas those in the higher bracket of earning have almost a 4% chance of being chosen. This of course doesn’t mean you should try to earn less money; indeed unless you have a dodgy accountant there shouldn’t be an issue at all.
2. Failure to Report Income Correctly
Copies of all 1099s and W-2s will be filed in the IRS database, where their computers will check to see whether your forms correspond with the data in their databases. If there is unaccounted income, your report will be flagged and you are likely to be subject to an IRS audit.
3. Large Charitable Deductions
The computers at the IRS work out an average charitable donation level for those on a similar income to you and compare that against your personal charitable deductions. If there is a large difference between you and your peers, it’s likely that you will become under the scrutiny of the IRS.
4. Home Offices
Claiming for home offices is a very good way of deducting taxes against rent, utilities and insurances. It is important to know you only quality if your office is used exclusively and on a regular basis for your business; you cannot claim your dining room as an office, even if that is where you do your work, because your family will also use the room regularly. Claiming the allowance shouldn’t be ignored if you are entitled to it – it can save you a lot of money.
5. Business Vehicles
Similarly to offices, vehicles are one item that the IRS auditors love to check. If you claim that your vehicle was 100% used for business over the period of a year will call the auditors running to your home – it’s very rare that a vehicle will be used solely for business purposes, especially if you do not own another vehicle. It’s advisable to ensure you have detailed logs of journeys which you have taken, as if there are discrepancies or you lack logs, the IRS will disallow the claim.
6. Failure to Report an off-shore Bank Account
If you have a bank account in a «tax haven», you can almost guarantee that you will receive a knock on the door that announces an IRS audit. Over $4.4 billion has been successfully reclaimed by the IRS from people who have voluntarily disclosed information about their foreign accounts in exchange for a lower penalty against them. Penalties for not disclosing such information is taken very seriously and punishments go right to the top of their priority list.
7. Rental Losses
Real estate losses are being increasingly scrutinized by the IRS when filed from taxpayers who are claiming to be professionals at real estate. If your day job is not in real estate and you haven’t spent over half of your working hours in that profession, they will be looking very closely at any rental losses you file.
8. Business Meals, Entertainment and Travel
If you are self-employed this can be an effective way to mine some gold back due to expenditure. However it’s similarly a gold mine for IRS auditors, who focus on the self-employed and their expenditures. Large claims for meals and travel will cause a red flag to appear due to the strict rules which are applied to claims.
I hope that you’ve found my list of 8 Reasons the IRS will audit you helpful, and that you can use the advice listed here to avoid having a visit from the ominous IRS auditors. You should remember that as long as there are no omitted details in your Tax Return, you have no reason to fear an IRS audit!
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