The possibility of facing a tax audit by the IRS can be intimidating and overwhelming. Many individuals are, therefore, worried about making mistakes when filing taxes. A mysterious meeting with the IRS can never be good news for anyone.
Luckily, you can work towards avoiding factors that trigger an IRS tax audit. Although each situation is unique, below are common factors that may increase your chances of being audited.
The IRS states that every individual needs to report all income. Therefore, this means that you have to include every dollar earned. Your freelance work and tips should make it into your tax return. As a rule of thumb, you have to provide a 1099 form specific to every instance when income generated is over the $600 threshold. If the reported income fails to match what the IRA receives, it will automatically trigger an audit.
The IRS often audits individuals with cash stores or assets in other countries. They understand that some nations have flexible tax laws. Therefore, they closely scrutinize any persons with foreign assets. All your information is vetted to ensure your yearly taxes are in order. It is, therefore, vital that you keep your taxes up-to-date if you have foreign assets.
Indicating businesses as hobbies
It can be tricky to know where a hobby ends and a business starts. Therefore, most people confuse their hobbies with business. Doing this gives you certain tax benefits when filing returns. However, the IRS includes specific rules that differentiate hobbies from businesses. Failing to clarify between the two will likely increase your chances of an IRA audit.
Most people don’t know how to explain a sudden overflow of cash. For example, how do you file income from idle fantasy or entertainment media? Therefore, any type of huge cash deposit or significant spending is a red flag for the IRS. It’s only natural for the IRA to want to rule out unreported cash payments and illegal activity.
Thanks to advancements in technology, the IRS can use machine learning to track any anomalies in tax returns. Their computer system is designed to validate every piece of information on tax returns. Some of the most common anomalies include invalid tax deductions, duplicate information and improper charitable donations. Therefore, ensure you take a close look at your documents when filing taxes.