In 2017, the IRS selected over a million returns from 140 million taxpayers for a tax audit. Those chosen are for people who either made a mistake while filing their returns or did something else that triggered an IRS tax investigation or audit. Although the number of audits have since decreased, the government continues to pick some tax returns every year for additional review and scrutiny through computer algorithms. In this blog post, we discuss five lesser-known factors that can trigger an IRS tax audit. Read on!
1. When Taxpayers Fail to Report all Income
According to tax law, individuals and companies that hire taxpayers must report their pay both to the taxpayers themselves and the IRS. The IRS, therefore, receives copies of all of the 1099-MISC and W-2 forms filed by organizations for freelance work or employment and 1099s for dividend and interest income. All these incomes are tied to Social Security numbers, and if companies fail to report all the income to the IRS that the government is already aware of, this could be considered as a clear discrepancy in its automated system. Under such circumstances, the government can initiate an IRS tax investigation or audit of the affected returns.
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2. When a Taxpayers Has Extremely Low or High Income
The IRS is likely to be more interested in auditing taxpayers with extremely high and low incomes. The chances of an IRS tax investigation rise when people earn more than $1 million annually. Most of the time, people who have high incomes have multiple sources to generate money, which increases the chances of complex returns and multiple audit triggers. On the other hand, taxpayers who have low income are quite often questioned by the IRS about tax credit claims or excessive deductions.
3. When Taxpayers run a Cash Business
When taxpayers make large transactions of more than $10,000, businesses should report them to the IRS, even if they are just making a purchase. The same is true even if they make large deposits of cash into their bank account. Such cash transactions may raise questions with the IRS especially when taxpayers report a lower income. If taxpayers use a Schedule C when filing their reports and taxes mostly in cash income, the IRS can make extra checks to establish whether or not the taxpayers are overstating their expenses and can also trigger an IRS tax audit. When faced with such scrutiny, taxpayers may seek help from an experienced tax resolution attorney to clarify their income sources to the IRS.
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4. When Taxpayers Deduct Entertainment Expenses
Self-employed taxpayers are always more prone to tax audits by the IRS due to the greater flexibility they have in reporting their income and expenses. Some types of claims that draw more scrutiny are deductions for business travel, entertainment, and meals. If a taxpayer is an employee who has already been reimbursed by their company, they can’t claim these costs on their taxes as well. If the taxpayer is a business owner, they must make sure to keep documentation of the expenses along with the business purpose associated with them to play fair with the IRS.
5. When Taxpayers Itemize Their Deductions
After the Tax Cuts and Jobs Act in 2017, most taxpayers take the standard deduction on tax returns, which makes itemizing less accessible. Itemizing deductions is critical for many taxpayers who have a small business and complex tax returns. If they claim large charitable deductions, they may have to provide proof to the IRS for those donations as the government does not expect that people donate large percentages of their income and is skeptical about such large donations.
Taxpayers must know that most disparities related to tax returns are flagged by IRS’s computer algorithms rather than human eyes. This computer system emphasizes certain types of large deductions, unusual claims, shared dependents, and many other questionable items. Taxpayers with complex returns must seek assistance from a tax resolution attorney who can help maximize their tax refund while staying within the protocols of the IRS. To discuss your case and learn how we can help, call (972) 484-0829 or fill our contact form for a free consultation. We have a team of highly knowledgeable and experienced IRS tax law professionals who can help you overcome any IRS tax problems.