Here Are the Most Common IRS Audit Red Flags
If you file your taxes and you have been negligent in the past, there is still a chance that you will be audited. However, there are many audit red flags that may help protect your privacy and help you avoid detection. If you are familiar with these red flags, the better for you because you will be safe. If you are reading this article, you are concerned about the IRS audit process and are afraid that you might be exposed to certain red flags. You might also be checking this article because you plan to file your taxes and wants to be on the safe side. Therefore, here are the common IRS Audit Red Flags you should look out for to ensure you are on the safe side.
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What are IRS Audit Red Flags?
If people hear the term "red flag," they tend to think of security issues or signs that someone has been involved in illegal activities. However, the term is more commonly used in the corporate environment. This term describes any action that would cause an employee to question their loyalty to a company. It is also used to describe factors that would cause a company not to hire someone based upon their attitude. In the case of being audited by the IRS, these red flags are often factors that would make an auditor ask more questions about your finances and your compliance with your taxes.
Failure to report all of your taxable income
The main factor leading to an audit is the amount of income you report when you file your taxes. Your tax return is built around the information that you provide. The more income you report, the more likely it is for the auditor to question why it did not appear on your W-2 forms. In many cases, people will report more interest income than they received. It might be surprising, but many people do not correctly report their income to their employer.
It is important to note that 1099 forms are filed when people receive a form of income that is considered independent of their company. This can include tips, renting out a room in your home, and selling stocks or bonds. While your wages are often reported on your W-2 form, you will need to file this as a claim for independent income and fill it out as such. Additionally, it should be noted that capital income will also be included in your tax return. This includes interest earned from a savings account, dividends, and rent payments. While many people are unaware of this distinction, it is important to keep it in mind.
Don’t Forget to Report Earnings Outside of Your Job
It is also important to report all of the money you earned outside of your job. This will include things like rental income, accident or dental benefits, and other sources that you might not be aware of. This can also include freelance income, royalties, and side jobs. The IRS has special codes for this type of information, so it will be important to know how to properly use them when filing your taxes.
Finally, it is important to realize that certain types of assets can affect your tax liability. For example, if you own a home or a car that is worth more than $1,000,000 and you are married filing separately, it will be important to report the value of this property on your tax return. If you are married, filing jointly, and have debt payments exceeding 50% of your income, this can also be considered when determining the amount of taxes you owe. This is known as the home equity exception.
Withholding information that is not up-to-date
Another major reason for an audit is that your withholding information is not up-to-date. When you get a fresh paycheck, you will use it to update your tax withholding information with the IRS. Newly hired employees often get several tax breaks, including the earned income tax credit and additional personal exemptions. However, if you are not accurately reporting your withholding information, you could be surprised when it comes to your taxes. This is why many people opt to use payroll service companies to be sure that their withholding information is correct.
Additionally, it is common for people to increase their contributions to retirement accounts when they receive a tax refund or a salary increase. However, it is important to note that you cannot simply withdraw money from your retirement accounts and deposit it into a bank account. These types of accounts are known as IRAs and Roth IRAs. If you overestimate these amounts and then file for an audit, the IRS will be reasonable enough to ask for this money back, meaning that you could be facing penalties and fines if you do not respond to the audit request.
Making too much money
If you're an American who earns six figures annually, you might have to worry about a possible IRS audit. In fact, the odds of being audited in this income bracket are considerably higher than they are for those earning less. The IRS is increasingly targeting the country's highest earners because they have the means necessary to pay more taxes. Plus, small tax audits are quicker and easier than large ones, allowing the agency to better use its resources for big cases. With all this in mind, check out these average and borderline red flags to see if your income makes you a target.
Red Flags for Income
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You might have no reason to worry about this one since it's relatively easy to satisfy the agency and get it off your back. In fact, you can simply send them a signed letter asking that they confirm your tax returns if they haven't already. Red flags vanish when they are addressed properly.
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If you've earned a high income during a year, the IRS will likely ask that you provide proof of it. It can take the form of a W-2, 1099, or other documents. In addition to helping you with taxes, these documents can be used as proof at the time of filing if you have problems with identity theft or fraud. When you open a bank account or sign up for any financial product, ensure your new company provides you with an official form for your records.
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It's natural to want to deduct as much money from your tax return as possible. But if you make a significantly higher income, you'll need to be careful about claiming too many deductions. The IRS will want the proof for each deduction and might consider them fraudulent if you can't provide it.
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When higher-income taxpayers are audited, the IRS usually checks out their books at home and work. For this reason, it's important to keep proper documentation of your property and investments. If you own a rental property or foreign assets, you might need to secure an accountant who can help you keep proper records.
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You may be able to make more money with additional jobs, but it can also increase the risk of an audit. The IRS notices cases where taxpayers have worked for multiple companies for the same amount of hours in a year and are taxed on it at the same rate. You might find that you've been under-reporting your income from one company and over-reporting it from another. When you're working for more than one company, be sure to report income separately on each W-2, so you don't raise any red flags.
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Talking about donations and seeking tax deductions for charitable donations is something that many people talk about. However, sometimes it's a red flag for IRS audits, so it is important to be careful what you say. If you're caught in an audit with a poorly documented donation, your donation could be questioned and disallowed.
You need to keep records that prove your donations exceed the IRS limits of 50% of adjusted gross income when you're making donations. You should have a record in writing of your donation, including who or what organization received the donation, along with their tax id number. The best part is that you don't have to itemize these deductions on your taxes. However, it is wise to keep these records just if the IRS questions them.
You should check with the IRS to see what you can deduct. You also need to keep track of your deductions and any business expenses. This is a good way for the IRS to spot instances where you might cheat on your taxes.
As stated above, this is a red flag for IRS audits, and you could lose the donation, so it would be best to be on the right side of things. If you are audited after making these donations, it would be best not to admit to making them until the IRS has asked a few questions about them. If it's too late, then just tell the truth and work with them on it.
Claiming rental loses
If you own a rental property, it's important to keep up with the latest tax facts. The IRS is attentive and persistent, and they'll be on the lookout for any irregular activity. Tax deductions are not "free money." If you're using your rentals to try to earn extra income through deductions, know that it could have unintended – even detrimental – consequences. Discuss your plans with an accountant or other trained professional before putting anything into action. Be particularly cautious if you're using your rental property as a vehicle to deduct business expenses.
Failure to file tax returns
When you fail to file your tax returns, the IRS will not only penalize you but may also audit your taxes. Here are three red flags that indicate the IRS is likely to enter into an audit.
You are not on the IRS's tax-return-filing list
You have unreported income from another source
You had a significant change in your business or financial situation since your last filing, such as a new job or starting a new business
If you meet three out of these four red flags, then you're likely to be on their hit list. If you discover that you are on the IRS's list of people who failed to file income tax returns, there are ways to avoid getting audited. One way would be to pay back taxes for all the years you neglected to submit your tax returns.
What is the Process for Filing an IRS Audit?
There are steps that you should be aware of when filing an audit. The first step is to request a letter from the IRS, which can be done through their website. This will usually take more than six months to get. Once you receive this letter, you can request a copy of all of the documents that they requested during the audit. If you do not provide all of the requested information, there is a possibility that the audit will be extended. This is why it is important to gather as much information before filing a request.
In order to avoid IRS audits, it is important to be as compliant as possible with your taxes. Maintaining good records and taking full advantage of tax breaks can help you avoid any problems when filing your taxes. The easiest way to deal with an IRS audit is to be aware of what can cause one. If you are audited, there are steps that you can take to help avoid penalties and fines. Finally, there are ways to prepare for this process so that you can be fully prepared when the time comes. Even if you are not audited, it is important to keep these tips in mind when filing your taxes so that you do not have any surprises when it comes time to prepare your tax returns.
How To Prepare For an Audit
If you work in the upper tax bracket and are worried about an audit taking place, there are things you can do to prepare your records. Start by securing an accountant who can help you keep track of your income and taxes. This professional can be a great source of guidance and will prevent them from raising any red flags on their own.
Have a completed, signed W-2 to hand over as soon as you start a new job. If you can't submit proof of income at the time of filing, you must have it ready to go when the IRS requests it. This will allow them to compare your income with the way your employer reported it on a document.
Keep complete records of your income year-round. If you can show the IRS when you made a higher amount of money in a previous year, they might reduce the amount they're asking you to pay. For example, if you were unemployed during part of the year and earned less than $60,000 annually, it might be worth going through your pay stubs and tax returns from previous years. You'll need good documentation if they ever decide to audit you again in the future.
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Bottom line
Now that you understand the facts behind the IRS Audit Red Flags you have a better idea of how to avoid getting an audit. If you are receiving a notice from the IRS, you will want to contact an experienced tax attorney as soon as possible. However, it is also important to understand that some cases do get resolved, and if this happens, it is important to respond quickly. The longer you wait to respond, the more likely it is that you will be penalized. If you are subject to a tax audit, do not let anyone tell you that the IRS does not care about your privacy. They are interested in getting details about your finances, so it is important to remain vigilant when filing your taxes and ensuring everything appears on your W-2 forms for the year.
Federal taxes are a responsibility that people need to take seriously. When filing your taxes, you may be enticed by promises of how easy it will be to file and how much money you could make. If you do not file your taxes, you risk facing penalties and fines. Those who the IRS audits typically get there because they have a history of not filing in the past or they do not show signs of being compliant with their taxes. Many people feel like tax auditors are out to get them, but this is often not the case. If you file your taxes and you have been negligent in the past, there is still a chance that you will be audited. However, there are many audit red flags that may help protect your privacy and help you avoid detection.