Why the IRS May Audit You
Paying your taxes is an unavoidable requirement for most people wanting to live in society and reap the benefits of government institutions provide. This is why you are required to file your tax returns with the Internal Revenue Service (IRS) every year. However, this can become a problem if the IRS decides to audit you.
What is an IRS audit?
When the IRS audits you the governmental agency is looking to examine and review your financial information and accounts to make sure you are in compliance with tax laws and have reported correctly on your tax forms. Basically, the IRS is simply verifying the numbers you reported and looking for discrepancies. Also, the state government may audit your tax returns as well.
The following are some reasons the government may be prompted to audit you.
You need to make sure your calculations all add up on your tax returns. Having too many mathematical errors can sometimes be a red flag for government auditors. Therefore, make sure to avoid making data entry errors. Double-check the numbers on your tax return and ensure everything adds up correctly. Also, the IRS may levy fines even if the mistakes were not intentional.
Not reporting some income
You are required to report all of your income to the IRS every year. This even includes freelance gigs that you may have done as a one-time opportunity to earn some extra money. Failure to include complete income information can prompt an IRS audit.
Claiming false charitable deductions
Be sure to have the proper documents to verify charitable deductions that you will be claiming on your tax return.
Schedule C with too many losses
Self-employed individuals should think twice before trying to hide their income by claiming personal expenses as business expenses. Reporting too many losses can make IRS auditors suspicious.
Too many businesses expense deductions
You should only claim qualified business expenses on your tax return. In order for an expense to qualify for a business expense for tax purposes it must meet two essential criteria. First, the expense must be “ordinary” to your type of business. Second, the expense needs to be considered “necessary” for your business. For example, a professional musician can deduct new guitar strings, but a real estate agent who plays music for fun will not be able to do the same.
Along with making sure to avoid an audit from the IRS, it is also important to pay attention to your overall financial planning. This can help you to maximize your resources as well as save on unnecessary tax charges. A professional financial planner will have the knowledge and experience to help you do all of this and more.
Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we do not render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.