Very few phrases inspire more fear in the hearts of taxpayers than these three words: “IRS tax audit.” Thankfully, audits are infrequent, and fewer than 1% of all tax returns will snag a spot on the audit list this year. However, don’t celebrate just yet – there are many common situations that can signal a red flag to the IRS, and make it more likely that you will be chosen for an audit.
Our Brevard County IRS & tax law attorneys have been helping clients handle audits and tax documentation for over 35 years, and we know how the system works. In this post, we’ll touch on the 5 most commonly seen triggers for an IRS audit, and what you can do to prevent them on your taxes.
The 5 most common triggers for an IRS audit include:
- Failing to report all sources of income. This mistake can creep up on you if you’re not careful, especially if you have multiple sources of income. It can be difficult to track down every financial account affiliated with your name, but it’s crucial that you do so in order to avoid an audit. Nothing looks more suspicious to the IRS than failing to report income, even if all the funds were in fact legally obtained. Unreported income can include things like college saving account distributions, Form 1099s, and older brokerage accounts.
- Claiming large business expenses. Thousands of Americans travel every year for business, and the expenses accrued during major trips can rack up quickly. However, when you report more than 20% above the norm for business deductions, the IRS may take a second look at how you were spending the businesses’ money. This is one of the areas they can be most stringent about enforcing, so be sure to triple-check your calculations when recording your business expenses during the year.
- Failing to report foreign accounts properly. Because of the negative stigma associated with foreign or “offshore” investment accounts, it’s critical that you carefully obey the rules of the Foreign Account Tax Compliance Act while filing your returns. Unfortunately, even listing a foreign account may increase your risk of an IRS audit, as the agency has been looking more closely at foreign transactions over the last few years. But taking the time to document your accounts accurately is always the better option, and will help to mitigate your risks of a lengthy audit. If you have more than $10,000 held overseas, you will need to file an FBAR (Foreign Bank and Financial Accounts) in addition to your return.
- Claiming deductions that don’t fit your income and profile. Ranging from rental property losses to charitable donations, there are many deductions that the average person can legally claim on their returns to lower their tax burden. However, if your charitable donation is too high for your income, or if you’re claiming rental losses on a part-time vacation house that rarely gets visited, the IRS will take notice. Make sure all your deductions are properly documented and accurate.
- Using crypto-currencies. Ever wary of financial trends, the IRS has turned their scrutiny upon the crypto-currency boom. According to CNBC, in 2017 the IRS focused heavily on individuals who traded in crypto-currencies like Bitcoin and ethereum. All capital gains and losses, even in crypto-currency, need to be reported accurately on your returns.
If you need skilled legal counsel during your tax defense, look no further than our Brevard County IRS & tax lawyers at The Buchalter Law Group. You can contact us at (321) 320-6088 or submit our online form for more information today.