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Four mistakes that increase your chances of being audited

On Behalf of | May 28, 2024 | Tax |

You don’t want to be audited by the IRS. If you are, then your finances will be put under a microscope, which could lead to extensive penalties or even allegations of criminal wrongdoing if it’s found that you underreported your income and failed to pay your taxes. While that’s stressful to think about, there are steps you can take to protect yourself before it ever gets to that point.

Commonly made mistakes that lead to a tax audit

Recently, the government expanded its tax enforcement measures. This could put you at an increased risk of being audited. However, here are some of the biggest mistakes you can avoid to decrease the risk of audit and ensure that you come out as clean as possible in the event that the government takes a closer look at your finances:

  • Not reporting all taxable income: Regardless of whether you’re paid as an employee and receive a W-2 or you’re an independent contractor who receives a 1099, make sure you report all taxable income on your tax return. If you don’t, the government may cross-reference what those who have paid you have submitted with what you’ve submitted, thereby allowing them to catch your mistake. This could lead to a notice from the IRS, an audit, and/or assessed penalties. Be especially alert if you’re a partner at an LLC or other company where large sums of money are paid to you as self-employment income.
  • Trying to stretch deductions too far: If you have documentation and justification to support large deductions, then you should certainly claim them. But you have to be honest. If you try to fudge the numbers to your benefit and the deduction seems disproportionate to your income, or if you force something that’s not a deduction into a deduction category, then there’s a heightened risk that the IRS is going to take another look to determine if you’ve been accurate in the utilization of legal deductions.
  • Over-relying on hobby loss: The law allows you to claim losses related to a hobby but only if you work your hobby in a business-like manner and you reasonably expect to make money from it. If you claim losses related to your hobby for several years in a row, then the IRS might become suspicious that you’re just using those losses to offset your other income. This could lead to an audit where your hobby activities are scrutinized.
  • Not reporting retirement account withdrawals: Several retirement accounts, including IRAs and 401(k)s, are subject to a tax penalty if funds are withdrawn before a certain age. If you improperly report these withdrawals on your tax return, then the IRS may want to take another look. After all, they’re aware that individuals oftentimes misreport these distributions on their tax returns.

Know how to protect yourself when the IRS comes knocking

Keep in mind that the mistakes mentioned above are only some of the many errors that could lead to entanglement with the IRS. And the stakes are high when the government conducts an audit. Therefore, if you’re dealing with a tax-related issue and are concerned about its ramifications on your future, then start thinking through what you can do to protect your interests. Even if you feel like the future is bleak in your circumstances, there may be legitimate legal strategies that you can deploy to fully protect yourself.