From time to time, when the IRS detects there might be something off about your tax filings, they might perform an audit or a review of your finances and the information provided to ensure you’re following tax laws. During tax season, when attempting to maximize deductions, some people are hesitant to claim everything they deserve, not wanting to trigger an audit. However, as long as you’re honest and have the documents to prove it, an IRS audit is nothing to fear.
That said, an audit is a serious matter that should be handled with care. Here are some of the most common instances that might prompt an audit from the IRS.
Going overboard on business expense deductions
Ordinary purchases that are necessary for work are eligible for a deduction, but many business owners see this as an opportunity to get creative with what they include. For example, a business columnist might claim an expensive new television as a necessary purchase to keep up with the news. Deductions that look like personal spending might draw attention, so keep this in mind when classifying your assets.
Reporting business losses
The IRS is always wary of taxpayers reporting certain activities as “business losses” to take advantage of the corresponding tax breaks. If you report too many losses, you might find yourself having to prove to an auditor that you’re running a legitimate business with the intent to profit. Operations that have profited in three of the past five years are considered businesses in the eyes of the IRS, but you can also legitimize your enterprise with thorough recordkeeping and a documented business plan.
Claiming unverifiable charitable donations
This one’s cut and dry. If you don’t have documentation of a donation, don’t list it for a deduction. If you’re making regular charitable contributions somewhere, you deserve the tax breaks that come with it, but many see this as an opportunity to stretch the definition of charity. Exceptionally high charitable deductions could trigger interest from the IRS.
Not reporting part of your income
Naturally, declining to report any income is a surefire way to draw the attention of the IRS. If you received a 1099 for any kind of work, the IRS has received a copy as well. The IRS requires issuers to turn in copies of anything given to you, the taxpayer. That means they’re already aware you’ve received this money. That goes for received interest income (1099-INT) and dividend income (1099-DIV) as well.
It might be tempting to report your W-2s and keep that freelance 1099 form to yourself, but you could very well be opening yourself to an audit.