Introduction
Facing an IRS audit can be a daunting experience. Understanding what triggers an IRS audit can help you take steps to minimize your risk. In this article, we’ll explore the common triggers for IRS audits and what you can do to avoid them. This article is sponsored by the tax professionals at the Law Office of Jason Carr. Contact the Law Office of Jason Carr. Call us at 888-661-6583 for assistance.
Common IRS Audit Triggers
1. High Income
High-income earners are more likely to be audited. The IRS scrutinizes returns with substantial income because they believe there’s a higher chance of uncovering significant errors or tax underpayments.
2. Large Charitable Donations
While charitable donations can reduce your taxable income, unusually large contributions relative to your income can raise a red flag. Always ensure you have proper documentation to support your claims.
3. Unreported Income
The IRS receives copies of all your W-2 and 1099 forms. Failing to report all your income, including interest, dividends, and freelance earnings, is a surefire way to attract attention.
4. Excessive Deductions
Claiming deductions that are disproportionately high compared to your income can trigger an audit. This includes business expenses, home office deductions, and travel expenses. Ensure you have detailed records and receipts to substantiate these deductions.
5. Cash Businesses
Businesses that deal primarily in cash, such as restaurants and salons, are more likely to be audited. The IRS is aware that it’s easier to underreport income in cash transactions.
6. Foreign Accounts
The IRS closely monitors foreign bank accounts. If you have over $10,000 in foreign accounts, you must file a Report of Foreign Bank and Financial Accounts (FBAR). Failing to report these can lead to severe penalties and trigger an audit.
7. Claiming Business Losses
If you’re claiming business losses year after year, the IRS may become suspicious. They might think you’re running a hobby rather than a legitimate business. Ensure you can prove your business is intended to make a profit.
How to Minimize Audit Risk
1. Report All Income
Ensure you report all income accurately. Cross-check your records with the income reported on your W-2 and 1099 forms.
2. Maintain Accurate Records
Keep detailed records of all income, expenses, and deductions. This includes receipts, invoices, bank statements, and any other relevant documents.
3. Be Cautious with Deduction
