By Gianna Botti
Most taxpayers would agree that one of the most feared situations for an individual or a small business is a tax audit. We‘ve all heard of or even received one of those phone calls where the person on the other end of the call is claiming to be an IRS agent. The recipient of the phone call usually hangs up the phone, knowing full well it’s just a scam. However, what do you do when you’re coming home from work and you open the mail box and are greeted with a letter from the IRS? After reading it in detail you quickly realize you’re being audited. To avoid this situation, let’s take a look at some common audit triggers the IRS sees as red flags.
The IRS doesn’t choose a return at random to see if a person or business qualifies for an audit. They use a computer program that analyzes each return and looks to see if the returns are out of the ordinary. There are certain areas that this system looks out for and if your return is unlucky enough to fall into those categories, you might find yourself getting audited.
Common Audit Triggers
Some simple situations that can cause the IRS to look heavily at your business or individual returns range from having higher than average income to having mathematical errors throughout your return. Businesses and individuals who make $1 million or more are at a greater risk of an audit than those who make under that threshold. To mitigate your risk of owing additional taxes and penalties, keep detailed financial records, year to year. Mathematical errors can range from poor bookkeeping to simple rounding errors. If you earn, for example, $1,987,111.67 – your books and records should agree. Also, avoid rounding to whole numbers.
Excess deductions may also raise red flags to IRS agents. Watch out for business entertainment deductions. If you’re taking a trip to Tennessee to see your favorite country artist, avoid taking that as a business entertainment deduction. If you have a home office, be careful when you’re trying to take it as a business deduction. It must be used strictly for your business. Lastly, be aware of how you try to use deductions for your “business car”. You have a choice between deducting the IRS mileage rate and the actual expenses but you can never deduct both. Keep records of every trip, including the mileage and business purpose for each trip you take.
Keep in mind that these are only small, simple audit triggers that might cause the IRS to pick your return out of the pile. There are many other situations that may arise where you’ll find yourself with the IRS on your case. Keep detailed financial records and always be aware of what’s going on with your tax filings and be sure that, if you ever find yourself in this situation, you’re able to support your claims.