An IRS audit is the last thing anyone wants to deal with.
Most of us have plenty on our plates right now. What with homeschooling our children, figuring out how to work from home, or putting our lives on the line as essential workers — all while navigating the world and figuring out how to stay safe in the midst of a pandemic. An IRS audit is the absolute last thing anyone needs right now.
When the Internal Revenue Service audits you, they are taking a closer look at your tax returns to ensure that all tax laws have been followed and to verify that the correct amount of tax has been paid. IRS audits can be stressful, but the good news is that they’re not all that common.
Luckily, we’ve still got a couple of months left before our tax returns are due. However, when you do decide to file, you need to know what could potentially trigger an IRS audit,
5 Common Things That Can Trigger an IRS Audit
#1. Failing to report all of your income.
The number one way to ensure that the IRS will come knocking is to fail to report all of your taxable income.
The gig economy has made doing our taxes even more of a headache because it means keeping track of more forms and more sources of taxable income for many people. But, whether your income comes from a more traditional source or from a variety of sources, it’s incredibly important that you report all of it to the IRS.
Any time you fill out a W-2 or a 1099, those forms are also sent to the IRS, which means that they already know about your taxable income. You’re not going to pull one over on them if you fail to report it; you’re just going to end up getting audited.
#2. Making math errors.
As someone who’s never been good at math, I know just how easy it is to make math errors while doing calculations for your tax return. As easy as it is to make mistakes, though, it’s important to get it right.
Calculations that don’t add up can absolutely trigger an IRS audit, but it’s not the only kind of math error that can do so. Any math error could trigger an audit, and that includes transposing the wrong numbers.
Always double check your math on your tax return and that you’ve transposed all numbers correctly, including your social security number.
#3. Overclaiming charitable donations.
Making charitable donations is one of the best things you can do with your money, and now more than ever, nonprofits and charities need support. And, when you are so giving with your money, you absolutely deserve to make deductions. However, if you want to avoid being audited, it’s critical that you claim only the donations you actually make.
Overclaiming charitable donations is one way that some people try to get around the system and take more deductions than they’re owed, which is why claiming lots of charitable donations can be a red flag for the IRS. That’s why any donations you claim need to be backed up by the charity you gave it to.
#4. Taking a home-office deduction.
Fraud is, unfortunately, very, very common when it comes to home-office deductions, which is why claiming a home office is one of the most common IRS triggers.
What qualifies as a true home office? The only people who are supposed to claim home offices are those with a dedicated space in their homes just for business. Even if you work from home — which many, many people are doing right now — you can’t claim any space you work in as a home office. It has to be dedicated to work exclusively. If you sit on the couch or at the kitchen table to do your work, it doesn’t count and can’t be deducted.
There’s no reason not to take advantage of home-office deductions if you do, in fact, have a home office. But, you better be able to back it up by having a dedicated space in your home just for business.
#5. Operating with a lot of cash.
If you’re regularly depositing or spending large amounts of cash, the IRS is going to start noticing. Thanks to the Bank Secrecy Act, which was implemented to help the IRS detect money laundering, the IRS is notified anytime someone completes a cash transaction of $10,000 or more.
If you are involved in regular cash transactions that meet or exceed $10,000, you can bet that the IRS is going to pay close attention to you, particularly if the income you report doesn’t support such large transactions.
Keep in mind that structuring your transactions in order to avoid the $10,000 limit can also trigger an IRS audit and is against the law. An example of structuring is when someone deposits $9,500 in cash at one branch and then $600 at another.
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