Facing an Internal Revenue Service (IRS) tax audit can be intimidating, but understanding common triggers can help avoid this situation. Here are some common factors that often lead to audits and tips on preventing them.
Unreported income
The IRS obtains duplicates of your earnings statements. They will detect the discrepancy if you omit income from your tax return. Ensure you report every income source, including freelance work and side gigs. Accurate reporting helps you avoid red flags.
High deductions compared to income
Claiming disproportionately high deductions compared to your income can attract IRS scrutiny. For instance, if your charitable contributions or business expenses are unusually large, the IRS might take a closer look. Keep detailed records and receipts to substantiate your claims.
Home office deduction
While the home office deduction can be beneficial, it’s also a common audit trigger. You must use your home office exclusively and regularly for business to qualify. Ensure you meet all IRS requirements and maintain proper documentation.
Business losses
Reporting business losses year after year can raise suspicion. The IRS may question whether your business is a hobby rather than a legitimate enterprise. To avoid this, keep thorough records and be prepared to demonstrate your business’s profit motive.
Cash transactions
Large cash transactions can also trigger audits. If you deal with significant amounts of cash, keep meticulous records. This is particularly important for businesses in Texas, where cash transactions are common in industries such as hospitality and retail.
Foreign accounts
If you have foreign bank accounts, you must report them. The IRS has strict reporting requirements for foreign assets. Failure to comply can lead to severe penalties and increase your audit risk.
Remaining tax compliant
Understanding these common audit triggers and taking proactive steps to avoid them can reduce your chances of facing an IRS audit. Always keep accurate records and consult with a tax professional if you have any doubts about your tax filings. Staying informed and prepared is your best defense against an audit.
