Understanding what triggers a tax audit can help you defend yourself, well before the tax forms are even filed. Here’s what you need to know.
As with most things related to the complicated tax code, figuring out what triggers a tax audit can seem like an exercise in futility. The good news is that audit letters go out to only a tiny fraction of individuals and businesses each year. The bad news is that sometimes the target of that audit is you.
What Triggers a Tax Audit?
When planning out your tax filing, look for these five red flags. The more of these you have on your tax filing, the more likely you will find yourself opening up that audit notice.
No, it’s not fair, but it’s true: Those who are self-employed face audits at a much higher rate. The IRS is aware that large businesses have impeccable records, as well as tax attorneys who can fight tooth-and-nail to ensure their deductions stay in place. But the self-employed person is busy running his business, might not have bulletproof records and could choose to represent himself in an audit. These facts often lead to a slam-dunk for the IRS.
You have a home office.
The IRS loves the juicy audit possibilities with the home-office deduction. Taxpayers can fight this with close attention to the rules. For instance, the home office should be for business use only, with no exceptions, and must be in a dedicated area of the home. Even letting your child watch television in the office, while you work, can be enough for the IRS to disallow the deduction.
You have large deductions.
Some large deductions, such as those for medical bills or charitable contributions, can trigger a closer look. If the IRS believes your deductions are too much for your tax bracket, an audit letter hits your mailbox. The best way to fight? Keep impeccable records.
Your income has changed.
A significant drop in income from one year to the next can trigger an audit. The IRS tracks historic data for each taxpayer, so a sudden dip in earnings raises suspicions of underreporting. On the flipside, an income that skyrockets in a short period of time will also draw careful attention from auditors.
Your reported income doesn’t match up.
Anyone who provides you with a W-2 or 1099 must also send a copy to the IRS. But remember, just because you don’t receive a 1099 doesn’t mean you get a free pass on claiming that income. Keep detailed records of the work you performed, your compensation for that work and when you received payment.
Turning to Help During a Tax Audit
These are just a few of the many reporting nuances that raise suspicions with the IRS. Your best line of defense in any audit is strong, clear documentation. Keep accurate records of everything you will report on any tax form. Remember, the IRS hates documentation, because it proves you are right, meaning they are wrong.
Understanding what triggers a tax audit, as well as knowing where to turn for help if the worst happens, is the best way to prepare for the possibility. If you have received an audit letter, get in touch with us immediately. We’ll help you figure out the best way to proceed.