How to Avoid Triggering a Red Flag IRS Income Tax Audit

How to Avoid Triggering a Red Flag IRS Income Tax Audit

Filing your taxes can be stressful, especially if you’re worried about getting audited. While there’s no surefire way to completely avoid an audit, there are some steps you can take to reduce red flags and lower your chances of getting that dreaded letter from the IRS.

In this article, we’ll go over some of the main triggers for audits and give tips on how to steer clear of them. We’ll also talk about what to do if you do get audited, so you can be prepared.

File Accurately and On Time

One of the best things you can do is file your taxes accurately and on time. Even if you owe money to the IRS, it’s important to get your return in by the deadline (usually April 15). Filing late or not at all is a huge red flag.

When preparing your return, double and triple check your numbers. Make sure income, deductions, credits, etc. are all calculated correctly. Small math errors can trigger an audit, so take the time to get it right.

Also, don’t forget to sign and date your return! This is a common mistake that can raise suspicions.

Report All Income

You need to report all taxable income, even if you didn’t get a W-2 or 1099 form for it. The IRS gets copies of these documents too, so if their records don’t match what you reported, it can prompt an audit.

Make sure to include:

• Wages
• Interest
• Dividends
• Capital gains
• Side income
• Any other taxable income

If you’re self-employed, keep detailed records so you can prove the income numbers on your return.

Don’t Overstate Deductions

While you want to claim all the tax deductions you’re legally entitled to, make sure not to overdo it. Oversized write-offs compared to your income are a red flag for auditors.

For example, taking a $20,000 charitable deduction when your income is $50,000 will probably get noticed. Be realistic with your deductions.

Also, back up your deduction amounts with documentation in case you get audited. Keep receipts, logs, etc. to validate expenses.

Limit Business Losses

If your small business shows a loss year after year, the IRS may start wondering if it’s actually a business or just a hobby. Limit your losses by reducing unnecessary expenses.

If the losses are legitimate, be sure you have proof that you are truly trying to make a profit in case of an audit.

Avoid Frivolous Tax Arguments

Every year people try to avoid paying taxes by making frivolous claims. This is a sure way to get audited and penalized.

Some examples of frivolous tax arguments:

• Federal income taxes are voluntary
• Only foreign income is taxable
• Wages are not income
• Filing a return is voluntary

Avoid these kinds of claims on your return. The IRS has heard them all before and will come down hard on taxpayers making them.

Be Realistic With Business Expenses

If you’re self-employed, only deduct valid business expenses – things that are ordinary and necessary for your work. Don’t try to write off personal expenses.

Make sure the amounts are realistic too. For example, claiming $10,000 in phone expenses for a small sole proprietorship will look questionable.

Don’t Leave Things Blank

Leaving lines blank on your return raises questions. If a line doesn’t apply to you, fill it in with a zero. Don’t leave it empty.

Also, answer all questions and explain any special circumstances. The more info you provide upfront, the less likely the IRS will need to follow up.

Choose an Accountant Wisely

If you use a tax preparer, make sure they are reputable. Unscrupulous accountants sometimes fudge numbers in hopes of getting their clients bigger refunds, which can lead to audits.

Do some research and ask around to find an ethical preparer with a good track record.