Being audited by the IRS is something that not a single person wants to think about, yet when tax season comes around it is a fear that some may have. The good news is, so long as you are filing your returns correctly, are acting lawfully, and keep your financial books up to date there is almost no need to fear! That being said, it is worth mentioning that as of 2020, the IRS announced it would be auditing more small businesses — so make sure you are following the law correctly.
Why does the IRS audit people? Well, taxes can be tricky! Honest mistakes can happen when filling out complicated forms — which is why we at Coastal Tax are always here o help! Filling these forms out incorrectly can raise a red flag for the IRS; raising this red flag does not automatically mean you’re in trouble, but looking into the issue can create a better picture for all parties involved as the IRS checks your numbers for accuracy. Some audits are completely random whereas others are flagged for suspicious activity. Today, we are highlighting some of these red flags that would put you in a position of receiving an audit.
Cash-Based Businesses
Cash-based businesses are increasingly a rarity in 2022, but rest assured that they still exist! Any cash transactions greater than $10,000 may be reported to the IRS. If a business is completely cash-based and relies on transactions of this kind, the IRS may be paying particularly close attention since this leads to more opportunities for fraud since cash-only does not leave a paper trail the same way that credit card transactions do. Large cash transactions with less reported earnings is a definite red flag in the eyes of the IRS, so be wary and be accurate upon reporting.
Not Reporting All of Your Income
The easiest way to be flagged for a tax discrepancy is to not accurately report your income. If you’ve switched jobs throughout the year, you might not feel it’s necessary, to report all of your income but rest assured your employer will be reporting this to the IRS even if you are not. If you’re self-employed, you might receive multiple tax forms a year (1099s typically); for each tax form created it goes out twice: one to you and one to the IRS, meaning, there really is no way around reporting all of your income. Not reporting your income accurately will flag a discrepancy, making the likelihood of the IRS following up with you more likely.
Reporting Inaccurate Losses on a Schedule C Form
A Schedule C (Form 1040) is used to report income or loss from a business you operated or a profession you practiced as a sole proprietor. If you happen to be filling out a Schedule C and decide to jot down some personal expenses thinking you’ll pull a quick one, our advice to you is: do not risk this. Since this form is intended to be used for losses, the IRS keeps a particularly close eye on listed losses for those that seem excessive, putting you at a higher risk for an audit.
Deducting Unnecessary Expenses
In the same vein of misreporting losses on a Schedule C form, the IRS places quite a bit of scrutiny on expenses deducted relating to travel, meals, and entertainment. While many businesses do require travel that should be taken out, do not take advantage of this with large numbers that are illegitimate and unrelated to your work endeavors. If you truly are partaking in a lot of entertainment events for work, keep a paper trail to show evidence of accuracy.
Did You REALLY Make Those Charitable Donations?
Charity tax exemptions are a nice little incentive from the government to give back to a community and for those who need help, but if you are claiming a lot of charitable donations, this can trigger an audit. If you’re donating an amount that seems excessive for your income, this is likely to raise an eyebrow or two as to if you are truly making these donations or trying to find a loophole. If philanthropy is your thing, be sure to keep receipts and evidence of these donations in the event this gets flagged.
Incorrectly Following the Home Office Deduction Rules
Home offices are increasingly popular as many companies shift to full-time remote positions in the aftermath effect of the pandemic. Home offices are, in fact, tax-deductible, but these tax deductions must adhere to specific rules that regulate how it works. A multi-functional space does not count toward a home office, and a true home office must be dedicated to this purpose.
Not Making Money
Starting a new business is not easy, which is why the IRS allows you some leniency for reporting your income when you are starting a business and breaking even. Despite this, there should be a point at which income is being made, and if you’re not reporting this, there is reason to be suspicious. If you fail to report your income every three out of five years, the IRS will almost certainly flag your business as being unprofitable and potentially auditable if it is working in an unlawful, non-profitable manner.
Making Too Much Money
In the same way the IRS is suspicious about those not making any money, making too much money can be a red flag. High-income earners have the potential to hide thousands of dollars, therefore, being a high-income earner can make you more susceptible to scrutiny related to your tax return — double checking everything and hiring a trusted accountant can help in this regard.
Using Rounded Off Numbers
We totally understand why you love using rounded numbers: they’re easy, they’re pretty, and they’re less complicated to add and subtract. However, they’re not necessarily accurate and the IRS is aware that not everything rounds to a five or a zero. If you’re rounding off all of your numbers or estimating them, the IRS may be suspicious about these convenient numbers.
Do Not Make Mistakes
Not making mistakes is often a lot easier said than done, especially when it comes to complicated paperwork like tax forms. For any confusion, we’re here to help you make sense of the forms you’re filing and streamline that process completely. Unfortunately, even if a mistake is unintentional, you may still be audited for sizable errors. Be sure to double check everything, ensuring you didn’t add or subtract any zeros, making sure the decimals are in the right place, and making sure your calculations are accurate.
We at Coastal Tax hope these tips give you some clarity while you file your taxes this 2022 season. As mentioned, we know this process can be confusing, overwhelming, and an overall pain so we hope to minimize this tension for you and bring as much clarity as we possibly can. For any help or additional guidance, please visit our website for additional information or contact us via phone at 843-549-5561.
