The number of audits the Internal Revenue Service (IRS) are doing is lower than ever, but this doesn’t mean taxpayers should be complacent when completing their tax returns. Most people will agree that completing a tax return form is stressful enough, let alone an audit. To avoid any unwanted stress, here are some of the biggest factors that raise alarm bells for the IRS.
The higher someone’s income, the more complex a tax return will be, as it’s more likely there will be errors. Tax returns showing a minimum of $200,000 have a higher chance of an audit, approximately 1 in every 30, and filers declaring $1million are even higher at 11 percent. The IRS are more likely to initiate an audit if there’s been a significant increase in your earnings over a short period of time, as they will question how your circumstances have changed.
Tax laws require companies to send remittances to both the IRS and the taxpayer who received the income. This also includes independent contractors and freelancers when they are paid at least $600 for their services. The IRS has information detailing exactly how much income you have earned, and if a payee fails to report an income, this will raise a red flag.
Ongoing Losses and Expenses
During the first few years after a business is set up, it’s normal to have teething problems and the IRS understands that there may a considerable number of losses. They are unlikely to investigate this, but if it continues for several years after, they may begin to ask questions.
Another flag the IRS looks out for is expenses, particularly for self-employed taxpayers. In fact, 60 percent of unreported taxes from 2008 to 2010 was owed on business and self-employment income. It’s important to keep receipts and records as evidence for all expenses and deductions. It also raises questions if you give a large proportion of your income to charity, or spend a large amount on mortgage interest, particularly if your reported income doesn’t match up.
In recent years, the IRS has cracked down on rules for taxpayers who hold money and assets outside of the United States. If you have a bank account or capital assets in a foreign country, be prepared for the IRS to probe.
Taxpayers who hold more than $50,000 in a foreign bank account must declare it on Form 8939 with their tax return. It’s also worth noting that overseas banks must identify to the IRS their American customers who hold accounts with them. It’s always better
These are some of the most common red flags that initiate an IRS audit, but don’t forget that audits also occur due to human error. The IRS are well within their right to request an audit regardless of any information you have or haven’t provided, so always be prepared to have the evidence to back yourself up.