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The Internal Revenue Service (IRS) is revenue service of the United States Government which is responsible for collecting taxes and administrating the main body of the federal statutory tax law of the United States i.e. the International Revenue Code.
An IRS Audit is one of those events that you want to avoid. No one wants to be told by a government agency that they have to pay more taxes. Even if you do everything according to the rules, your returns can be singled out by the IRS for scrutiny.
Why the IRS audit people?
In order to minimize the tax-gap that is the difference between what the IRS owes and what the IRS receives, the commonwealth is audited. In any case, if you want to avoid running afoul of the government, you should have a tax audit defense in place.
Moreover, it’s better to know why people get audited and prevent yourself from getting marked by the IRS by getting to know the top reasons for getting audited.
Here are the top 11 reasons why you might be on the IRS hit list
Mistakes and Omitted Information
It is very natural to make small calculation mistakes every now and then. However, filing taxes is one of those times where you have to be absolutely keen and pay attention to details no matter how small it is. Otherwise, if you make even a negligible error, it is most likely to be noticed by the IRS which will lead to your return being audited.
According to Michael Raanan who is the owner of Landmark Tax Group and a former IRS agent, mathematical errors are one of the most common mistakes on IRS returns, whether in paper or E-filing. Thus, before you submit your returns electronically or by mail, it is absolutely necessary for you to double check all the details and include all the required information.
You Bring Home a lot of Money
It is a known fact that if you earn a lot of money, you have to pay truckloads of taxes. The more money you bring home, the more the IRS is interested in you. If you pick up the tax-return statistic of 2016, it is evident that the IRS extracts more percentage of taxes from the higher income group.
It imposed 0.48% from those with Adjusted Gross Income(AGI) of $50,000 and $75,000 and 0.45% of those who made between $75,000 and $100,000. Those who made from $500,000 to $1 Million, the percentage rose to 1.56%. It doubled to 3.52% if the AGI is from $1 Million to $5 Million.
The percentage jumped to 7.95% when the income was between $5 Million to $10 Million and 14.52% if the income was equal to $10 Million or more.
Not Reporting or failing to Report Taxable Income
Let’s say that you earned some extra money from some other source apart from your regular job. You know that if you file for that extra income, the IRS will impose a tax for that extra income. It is very tempting to keep that income under wraps from the IRS.
What you don’t know is the source from where you’ve earned the money has already sent a copy of its payment to the IRS. When the IRS notices the omission from your part, you are gonna get audited.
Reporting losses on a Schedule-C
If you are an entrepreneur or a small business owner, then the IRS is probably looking down your shoulders. That is because it is very tempting for you to pass off your personal expenditures as business expenditures.
Before you buy a new sports car and report it as a business expense keep in mind that if you report excess business expenses or loss the IRS might suspect that you are committing tax fraud. According to Raanan, the IRS pays extra attention to those who file Schedule-C because self-employed individuals are tempted to claim too many deductions and do not disclose their full income.
Even if you buy a car, you have to prove how much of its use is tied to your business as the car is mostly utilized for personal use. Also, reporting too many losses will make the IRS wonder how your business is staying afloat.
Home Office Deduction Claim
If you work from home then you are eligible to file for a Home Office for your returns. If you claim your Home as a workspace, it could raise an issue with the IRS as business use of the home is a common red flag for the IRS. Many small business owners prefer working from home and save money by not spending on office space.
This Home office comes with a lot of benefits like deducting expenses such as depreciation, utilities or a flat rate per square foot. The IRS reserves the Home office for individuals who use their home exclusively for business oriented purposes.
Thus it becomes difficult to apply for the Home Office Deduction Claim as it is the breeding ground of tax fraud. The IRS is more likely to demand proof to back up your claim of Home Office so always be ready with the requirements to back up your claim.
Charity Donations are very High
Charity is a godly thing. Moreover, the IRS encourages people to donate things like clothes, food, money or even automobiles to the needy by offering tax deductions for charity donations.
However, people tend to take advantage of this encouragement by claiming that they have donated high amounts to the needy to escape taxes. Therefore, the IRS can audit you if your Charity deductions are very high.
Earned Income Taxes Credit Claim
You are eligible for claiming Earned Income Tax Credit if you have low to moderate income. However, you have to calculate the figures carefully before submitting the claim or else you will be subject to tax audit. The IRS pays extra attention to those who claim the Earned Income Tax Credit as there are many such fraudulent claims to earn the credit.
Not reporting Gambling Winnings
Gambling winnings are money made from a lottery, horse racing, casinos, sports matches, and from many more sources. It is mandatory to report all of your gambling winnings to the IRS. According to Raanan, failure to report recreational winnings can catch the attention of the IRS and you will be subject to tax audit.
The habit of using neat and rounded up numbers
It is a known fact that your expenses will not always be in neat, and whole numbers. Similarly, your taxes will not be in whole numbers. It is quite natural to round up 12.25 to 13. But these mistakes will add up to unbelievable numbers which will result in the IRS taking a closer look at your returns.
Not using E-filing
With the onset of Electronic filing of taxes, calculation errors while doing your taxes have reduced. According to Raanan, there are 21% calculation errors in taxes, calculation errors while doing your taxes have reduced. paper returns compared to just 0.5% in E-returns. File your taxes electronically and prevent the IRS from looking down your shoulders for calculation mistakes.
If you keep your assets in a foreign country
In order to escape the strict taxing system of the United States of America, people tend to store their assets in foreign countries with a more lenient tax system. However, the IRS has the authority to get access to the foreign bank accounts of Americans and it will do so if it suspects that you owe them taxes on the money or assets you have kept there.
You will be fine and not be a subject to an IRS tax audit if you follow the above steps and give keen attention to each and every pints mentioned above in detail before submitting your returns.
It may cost you more taxes if you are being audited. However, it is not always disastrous if you are being audited. In 2017, more than $6 Billion was refunded to nearly 34,000 audited taxpayers as an additional tax refund.