During tax season, and even throughout the year, IRS agents carefully review all tax returns they receive. To help you avoid raising any red flags that could lead to an audit of your tax situation, here are 7 potential audit triggers to be mindful of when preparing and submitting your return to Uncle Sam:
1) Failing to file a completed tax return
After your return has been completely filled out from top to bottom, review it with a fine-tooth comb. Make sure that every line that is applicable to your tax situation has been filled out completely and correctly. If you submit an incomplete tax return, the IRS may question why you did not disclose certain information on your return.
2) Reporting large amounts of income on your return
American taxpayers who are categorized into higher income tax brackets – particularly earners of over $200,000 per year – generally have a higher chance of getting audited, based on formal research. While the good majority of individuals bring in most of this income legitimately from a small business, a W-2 job, or through interest or investments, all taxable income must be reported on your return.
3) Attempting to claim large itemized tax deductions
If you choose to itemize your tax deductions rather than claiming the standard deduction, the IRS may compare and contrast your write-offs to what fellow taxpayers in your income tax bracket claim on their returns. If the agent reviewing your return determines that your deductions are a little high, they might give it a second glance.
4) Improperly claiming the home office deduction
Small business owners are fully able to deduct home office expenses on their tax returns. However, if you do not handle this deduction properly, it could raise a red flag. To claim the home office deduction when filing your return, you must use a specific area of your residence for business activities. You can write off either an appropriate percentage of your bills, or you can claim the flat-rate deduction of $5 per square foot with a maximum deduction of $1,500 for up to 300 square feet of home office space. It’s critical to fully document all of your home office expenses.
5) Deducting meals and entertainment incorrectly
Self-employed professionals are also allowed to write off 50% of business-related meals and entertainment activities as a tax deduction. But you must follow a few rules to ensure the agent reviewing your return doesn’t question the deduction. Stick to the 50% write-off amount, document who was present at the gathering, and don’t forget to write down the type of business that was conducted or discussed. Saving receipts is a must, and failing to do any of these things could lead to an audit.
6) Claiming inaccurate deductions on business losses
Business losses are commonly incurred, especially during the startup phase of a brand new startup company. To properly deduct any business losses you incur, they must qualify as deductible losses. The most effective way to meet this requirement is to launch or maintain a formally established business entity, such as an LLC or corporation. Doing so helps you prove to the IRS that these losses are actually tied to your business.
7) Not reporting all investment income you’ve earned
You must report any income you earn each year from interest, dividends, and other kinds of investments you make. The IRS wants to know about every type of taxable income you earn, so be sure you disclose it appropriately on your return.
To ensure you stay compliant with the IRS during tax season and throughout the rest of the year, turn to the accounting experts at 1-800Accountant. Call 1-800-222-6868 or check out www.1-800Accountant.