Even if you’re doing everything right, the prospect of a tax audit can be terrifying. What triggers a tax audit? Find out now.
There are few things as terrifying as potentially triggering a tax audit, yet the process itself is a bit of a mystery. Exactly what triggers a tax audit? How can you avoid one?
The IRS isn’t an open book about anything, including what triggers a tax audit. While the IRS does audit a certain amount of random returns, most of them start with those pesky red flags that arise when an individual or business files their taxes. When it comes to audits triggered by those red flags, here are a few things known to get their attention.
Not Reporting All of Your Income
The IRS receives 1099s, W2s, and other income reports directly from employers and those who have paid you for work done. If these forms don’t match up with what you report on your own tax returns, that could flag your account for an audit. You should receive all of your 1099s and W2s shortly after the end of the year.
You can compare your tax returns from your prior year if you are wondering if you may be missing some of your documents, such as a 1099-Misc from an investment account. In this situation, the IRS will often correct your file to accommodate the new income.
Exceeding Regular Expense Thresholds
The IRS is aware of what the regular expenses are of companies in specific industries. As an example, the IRS may know that a standard construction company may spend 20% of its income on the cost of materials, or an entertainment company might spend about 20% of its income on meals. If the business exceeds these expected thresholds, it could trigger an IRS audit.
This can happen when a tax filing mixes personal and business expenses, thus increasing those expenses, or accidentally misclassifies their expenses, thereby placing some expenses within the wrong category. Exceeding regular expense thresholds can happen when an individual or a business does not have controlled bookkeeping; having a regular bookkeeper and a professional tax preparer can help you avoid this common pitfall.
Earning Over $200,000
High-income earners need to be more careful than those in lower income brackets, as they are far more likely to get the attention of the auditors. The IRS doesn’t audit most simple returns, such as the returns of individuals who only have a single W2.
But if you earn over $200,000 you end up in a high-income bracket and you could face additional exposure to scrutiny. If you earn over $200,000, it’s a good idea to have a professional look over your tax documentation, and potentially have a bookkeeper review your monthly expenses. It’s worth it to potentially avoid an audit, as an audit can go back many years and lead to some substantial costs.
Remember, a tax audit only hurts you if your taxes are egregiously inaccurate. The best way to ensure accurate tax filing and reporting, so you can avoid an audit, is to hire a professional. Avoid the nightmare of a tax audit by contacting our experts at Incompass Tax, Estate & Business Solutions.