Fact: IRS audits are not random; in fact, these are strategically planned to target people with discrepant filing details. For example, a gross income of $20,000 with a $15,000 refund is like calling the IRS on their direct number.
IRS Audits can be extremely daunting; the fine structure can range from 20% – 80% of the filing. For most taxpayers, the rate of an audit is less than 0.6%, but this rate increases for those earning below $25,000. This is because many taxpayers claim the Earned Income Tax Credit fraudulently.
Reasons an IRS may knock on your door?
1. Incorrect details: If you have already filed your taxes, I hope that all your details are correct. If you are yet to file, go through the application process once again.
2. Gains and Deductions: Non-qualified deductions such as personal expenses, daily expenditures, and meal expenses can be a hot magnet for IRS Audits. This also includes debt cancellations, settlements, high business losses, large money transactions, other income, etc.
3. Losses or high profit-generating companies: transactions that do not add up are major causes for company income tax audits. This, added to the delay in paying taxes on dividends and profits are all the reasons for company income tax audits.
4. Incorrect filing status and tax brackets: Filing under the incorrect status of a taxpayer(s) can be legally inappropriate and attract IRS audits on your application. Non-existent Dependency claims, education loans, Head of the Household, Married or single, Joint or separate – all of the statuses need to be understood carefully before applying under a particular status.
Likewise, hiding part of income to show that you fall under a lower category can be a federal crime.
5. Earned Income Tax Credit: Designed for people who have low-income brackets come with a complex set of rules that need to be well-studied before claiming credits. However, since this is an easy hotspot for unethical claims, the IRS is stringent in qualifying people to receive the credit. This also means that the wrong Health Premium Tax credit is also red meat for the IRS.
6. Own a business, but did not report a profit for 3 consecutive years? You might be in line for an IRS audit. If there is a discrepancy in your individual tax filing and Corporate Tax filing associated with the same individual, the IRS can conduct a raid. Especially with C-Corp businesses, your personal tax returns should be similar to the corporate filing.
7. Home Office Deductions is another area that draws a lot of IRS Audits. This deduction can be claimed if you use a section or your entire house exclusively for business purposes.
Similarly, claiming the use of your personal vehicle for 100% business purpose might be the next big mistake. It is illogical if one shows the deductions for the same without having another vehicle for personal use. Also if there is 1, it is tricky to maintain records for the vehicle routes and purpose, overall.
8. Rounding up! – Did you have an expense of $10,771 but rounded up to $11,000? This might be a malpractice claim. Rounding up of deductions should be carefully done till the closest number; not a direct jump for saving taxes. If caught, you may be asked to produce proof for the remaining $200 – A rounding up of $10,800 would be best.
9. Retirement Payouts? – An early retirement payout can be like a bell button for the IRS; usually if withdrawn before the age of 59.5, this IRA account can incur a 10% penalty. The account is monitored by the IRS to ensure that the participants are paying their taxes on time. If you show an unusually large amount withdrawn under the guise of medical bills, physical disability, or any other grievous incidents without having the proof of it, the penalty rate can be extremely high.
10. Non-disclosure of gambling – Win / Losses, alimony structures, marijuana companies, security trading, and virtual currency operations, including cash Transactions or Foreign account investments, etc., all can lead to serious repercussions with added IRS income tax audits.
You are being called out for an audit. Now, what would be your next steps?
1. First, you would need to relax. It isn’t uncommon to make mistakes and receive an IRS audit
Fact: While the audit rate by the IRS is less than 1% of filers, the average amount owed in a mail audit can be around $7,000.
2. If not satisfied, you might come across either an ‘Office Audit’ or a ‘Field Audit’ – An Office audit is where you or your tax professional is called to the IRS office. This can occur anytime even a year since your concerned tax filing and may take 3-6 months for completion.
Field Audit might see the IRS at your field of operations: House or work that is registered for business or otherwise. Only post a thorough review of your finances and expenditures are you given the final verdict; this is done in around a year of post-initiation.
This time can be extended if there is an appeal, penalties, or any adjustments concerned.
3. Responding well in time can also draw minimal action; communicate your responses with details and maintain a log of all the finances shared.
4. If you are even a bit unsure of the tax handling, don’t do it! Making mistakes in an audit can only mean bad and hence, a tax professional can work much better for you for filing, returns, revisions, or amendments in taxes.
5. Prepare for an audit: A prime advice, you need to keep your finances clean and transparent as if you are expecting an audit. Consult your tax professional to be in sync with the latest tax developments on the IRS front and get complete information from your agency. You might be asked for the toughest of explanations so be prepared with them.
6. And lastly, don’t hesitate to appeal but do so within the deadlines with all the finances set straight!
Some questions we receive from the people:
Can I skip and ignore the IRS audit intimation?
If you do not want to pay a hefty sum as a penalty, we suggest you respond to the IRS audit notification well within the time frame. The IRS doesn’t give up easily on audits, especially the field audits since they are the most serious and involve businesses and big money. Your appeal rights can also be waived off in this case, so revert on time. contact your tax preparer to help you with them.
Can the IRS know my total income in a fiscal year?
The IRS is pro in identifying the total income of a person by an automated tally of the information on Form W-2 and 1099-Misc forms of the non-employees with a number of tax returns using SS number or other identifying information. These algorithms raise red flags and the IRS can then issue audits on the premise.
Tax filing should be done accurately and preferably under the guidance of a tax professional agency. Guaranteeing no audit is impossible, but you can easily avoid it. Filing returns within the time frame and maintaining transparency always reduces your chances of audit.
If you need help on audits, want to apply for refunds that are running short on time, or need a tax consultation, look for eTax Services – 100% Guaranteed Accuracy and complete Audit assistance. Free Tax estimates with 24/7 online and offline/in-person income tax filing.