Income Taxes

7 IRS Audit Red Flags You Should Watch Out For

Life works in wondrous ways and often leaves us grappling with puzzling questions. If you’re tangled up in tax concerns, you may find yourself constantly wondering about one thing: IRS audit red flags. To shed light on this matter, an IRS audit examines an organization’s or individual’s accounts and financial information to verify the accuracy of reported tax information. These audits can be meticulous, time-consuming, and stressful.

Rest assured, though, as TaxRise is here to help you dissipate the heavy fog of tax concerns. With years of experience providing tax resolution services, TaxRise has guided thousands to overcome their tax troubles. The professionals at TaxRise have specific expertise in understanding IRS audits, steering you in the right direction to address any potential red flags.

Significant Income Changes from Previous Years

When you earn significantly more or less than in prior years, the IRS may wish to understand why. This kind of fluctuation can indicate unreported income or inflated deductions. If your income shifts dramatically, the IRS computer systems will likely flag your return for review. It’s wise to have a clear, truthful explanation for these changes backed by proper documentation.

Ensure your income matches the returns employers, clients, and banks submit to the IRS. Even innocent mistakes can raise questions about your financial integrity. Providing additional context in your return can be helpful if there’s a significant change. A tax professional can guide you in reporting these changes accurately, ensuring they don’t become a trigger for an audit.

Large Cash Transactions Frequently Reported

Dealing with large sums of cash can naturally draw scrutiny. Banks report cash transactions over $10,000 directly to the IRS, and regular substantial cash deposits or withdrawals could lead to assumptions of underreported income.

The IRS is on the lookout for money laundering, tax evasion, and other illegal activities often associated with cash. If your business operates mostly in cash, ensure every cent is accounted for and maintain meticulous records. If your legitimate cash transactions are high, consider consulting a tax advisor. They can help you present your financial activity to the IRS transparently and compliant.

Claiming Home Office Deductions Aggressively

The home office deduction is a fantastic benefit for freelancers and telecommuters. However, aggressive claiming of this deduction is a common red flag. Ensure your claimed space is used exclusively and regularly for business, not personal use. Overstating the size of the space or the portion of costs associated with the home office can lead to trouble.

A best practice is to carefully measure your workspace and deduct only what’s appropriate for its size and your income. If your home office claim is significantly higher than your total income, this will likely prompt further review by the IRS. Tax professionals with experience in home business operations can help you accurately claim what’s valid, reducing your risk of an audit.

Excessive Charitable Contributions Relative to Income

Most of us feel compelled to donate to causes we care about, and the IRS encourages this act by allowing individuals to deduct charitable contributions. However, if your philanthropic donations seem disproportionate to your income, it could set off IRS alarms. Overstating charitable deductions lands many taxpayers in hot water each year.

The IRS isn’t looking to punish generosity. Instead, it’s seeking to recover lost tax revenues from those who claim donations they never made or exaggerate the value of what they’ve given. Studies show that taxpayers earning between $50,000 to $100,000 claim about 3% of their income as donations. If you give above this, it does not mean you will automatically be audited. Just ensure you have all the necessary documentation and proof of your contributions.

Reporting Rental Losses Year After Year

Passive losses, such as those from rental properties, can offer legitimate tax breaks. However, consistently reporting rental losses year after year can attract IRS attention. This does not mean that landlords cannot claim rental losses. Legitimate costs, such as mortgage interest, taxes, insurance, depreciation, repairs, and maintenance, can result in a property running at a loss, especially in the early years of ownership.

If you’re claiming losses, ensure they are legally and accurately reported. The tax code is complex and filled with gray areas for rental property owners. Consulting with a tax professional can prove beneficial to avoid unnecessary IRS attention. They can guide you, making sure your deductions are legitimate, and even find ones you missed.

Using Round Numbers on Tax Returns Suspiciously

Rounding to the nearest dollar on your income, deductions, and credits can simplify the math in preparing your tax return. However, too much rounding—especially to the nearest hundred or thousand—raises red flags with the IRS. It suggests you’re estimating rather than reporting exact amounts, which could lead to an audit.

Excessive rounding or regularly reporting rounded numbers may make the IRS think you’re covering up something more sinister, such as intentionally under-reporting income or over-reporting deductions. Report an accurate figure for every line item on your tax return. If you’ve estimated, recreate your calculations or check your records to ensure you report the correct amount. Having a tax professional double-check your calculations provides an extra layer of security during tax season.

Failing to Report All Taxable Income

It may seem like a no-brainer, but failing to report all taxable income is a surefire way to land in the IRS spotlight. Not just your income but all taxable income, including dividends, capital gains, or freelance income, that you may view as insignificant. Frequent random amounts may not seem like much individually, but collectively, they can add to a significant sum that must be reported.

The IRS is interested in every cent you earn, small, medium, or large. All sources of income must be reported on your tax return, including money earned from part-time or freelance work, sale of items, or rental income. Even if it’s a figure that seems irrelevant, it could lead to penalties or even legal prosecution if left off your taxes. Also, the government matches reports of income individuals with what businesses report paying, creating a high risk of getting caught.

The Power of a Free Tax Consultation

The journey toward clear skies past tax troubles can start with something as simple as a free tax consultation. At TaxRise, we understand everyone has unique tax circumstances; hence, we offer personalized consultation services to suit your needs. Rest easy knowing our certified tax professionals will build a tailor-made strategy to ensure a smooth ride toward resolution. Reach out to us today and step into the sunlight of freedom from tax worries!

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