A tax audit is the IRS or state tax authority double-checking your numbers to make sure there are no discrepancies in your return. Why would the IRS audit people? When there is a difference between what the IRS is owed and what the IRS actually receives. The IRS often audits taxpayers based on their suspicious activity. Here are reasons your return might trigger an IRS audit:
#1: Discriminant Information Function
Discriminant Information Function, or DIF, is a computer program used by the IRS, which scans every tax return the service receives using a specific to each type of taxpayer formula. If DIF finds any duplication in information or deductions and credits that are not justified, your tax return will likely have to be manually screened.
#2: Too High or Too Low Income
If you claim very high or very low income, you’ll likely draw the IRS’ attention. Complex tax returns are likely to include errors. According to IRS statistics, reporting an income in the bracket of $50,000 to $74,999 is the safest. If your income does not seem to match your overall assets, the IRS will likely take notice. For instance, if you live in a two-million-dollar home but claim only $30k on your income, you may trigger an audit.
If you don’t report all your accumulated income, the IRS might ask you to fill in some gaps. Your filed income should even include money earned in the form of cash, tips, or valuable gifts. The DIF will scan everything and failure to include any income receipts may raise a red flag.
#4: Large Cash Transactions
Every business should report large cash transactions to the IRS. You may trigger an audit if your reported amount is too large for your reported income to support. In the case of banking and financial institutions, the reporting laws impose time limits as well.
#5: Itemized Deductions
The IRS expects us to earn money, pay our bills, save what we can, and invest. However, if you make unreasonable claims for tax deductions for a significant portion of your income, the IRS may raise a question. It is likely to happen in the case of itemized deductions. If you do not earn enough to spend a great deal on mortgage interest and have reported an income that does not qualify you for such, it might raise questions.
#6: Dipping Into Your Retirement Funds
If you are below the age of retirement, a dip into your retirement funds means you have to pay a 10 percent tax penalty on the withdrawal. If you claim a deduction before the qualifying age, you may raise an audit with the IRS.
Freelancers and sole proprietors are entitled to make tax deductions for certain expenses such as office supplies, mileage, travel, meals, entertainment, etc. These expenses are deducted from your revenue to determine your taxable income from your business. Deductions that are above the norm for various professions may cause for an IRS audit.
#8: Claiming Your Hobby as a Business
Your hobby cannot be a business unless you have shown a net profit from it in at least three of the last five tax years.
#9: Assets in Another Country
If you have cash or assets in another country (especially with favorable tax laws), the IRS is specifically interested if you owe it money out of that cash or asset.
Get IRS Audit Help from TPI Group
Getting audited is not the end of the world, and sometimes, it’s unavoidable. Get professional IRS audit advice from the experts. Contact TPI Group today at (703) 288-1998.