Unless you are an expert aiding others in filing taxes or tax law, you probably hate taxes like the rest of us. Unfortunately, tax audits can create real headaches and instill fear in individuals who wing tax season.
Knowing the correct tax facts can save you down the line.
The IRS audits individuals each year. If they find your tax return to be inaccurate you could be subject to penalties. Let’s get our tax facts straight and explore top reasons the IRS may audit you this upcoming year.
Tax Facts Show Fewer Audits Each Year
Each year, audit rates in the United States continue to decline due to a reduction in staff at the IRS. 2019 saw a 0.45% individual audit rate, down from 0.9% in 2009.
Audits are performed to ensure that the majority of the American population is filing taxes and paying appropriately. Thankfully, your likelihood of getting audited is relatively low and continues to decline.
However, this doesn’t mean you can slack on your taxes. Penalties for inaccurate tax returns can be hefty. These range from additional interests, civil penalties, civil fraud penalties, and criminal penalties. These can cost you a hefty amount.
Criminal charges can also be on your record for a lifetime.
The safest way to avoid these penalties is to file on time and accurately. Unfortunately, even accidental mistakes can get you in trouble with a tax audit.
Top Reasons the IRS May Audit You
When it comes to taxes, an innocent mistake can cost you a lot of money and headache. Here are our top reasons the IRS may take a closer look at you via a tax audit.
- Mathematical Errors
If you have obvious mathematical mistakes on your tax return, the IRS is more likely to audit you. For example, reporting a $400 yearly income while filing for a $5000 business expense would trigger a red flag.
It’s always a good idea to proofread and double-check your tax return. Hiring an IRS tax attorney can also help ensure your taxes are accurate.
- Missing or Underreporting Income
Did you know that the IRS receives copies of employee W-2 forms? They also receive 1099 forms from contract work. it can be easy to forget about the smaller gigs you’ve completed before tax season.
Make sure you keep receipts and report all your taxable income to avoid a tax audit.
- Claiming a Large Number of Business Expenses
If you are a small business owner, it’s smart to file for deductions in taxes due to business expenses. It costs a lot of money to start and run a company. Claiming equipment and service expenses is vital.
However, this can become a red flag and trigger a tax audit if your business expenses are extremely high. Make sure you only claim business expenses.
If you use any items or vehicles for personal and business use, you cannot claim the entire cost of the item or vehicle as a business expense. Split any multi-use items or vehicles.
Legally Avoiding Tax Audits
Nobody likes tax season. But dealing with a tax audit is a bigger headache than filing correctly.
Ready to avoid audits and grow your financial endeavors in 2021? Read more on our blog today.