Every year, around the 1st of January through April 15th every working American is expected to file an income tax return with the IRS. This return is used by the IRS to determine what your overall tax bill should have been for the previous year. Using a number of forms provided by the IRS everyone has to report their income and expenses.
The agents of the IRS will then review your tax return and determine whether or not all of the information is correct and that you either sent a check to cover what you owe the IRS or whether you are entitled to a refund check. With that said, if it is determined that there are any issues with your tax return, this will trigger the IRS to take a deeper look at your return and more than likely request an audit.
What is an IRS Audit?
So, what does it mean when you have received a notice from the IRS that your return is being audited? What it means to you is that they have determined that they need to look deeper into your return and take a look at your deductions and income that you claimed on your return. This does not necessarily mean that you have done anything wrong, however, it does mean that they more than likely found something out of the ordinary on your return and they want to determine the nature of the deduction so that they can evaluate whether or not it is acceptable.
What triggers an IRS Audit – 7 reasons for an audit by the IRS?
#1 Errors found in your math calculations – One of the biggest red flags of a tax return is when the IRS finds that you have miscalculations in your math on your tax return. You want to always be sure that you rechecked each and every calculation that you made to fill out a specific box on the form.
#2 Leaving off income from your return – Our tax laws regarding income are very complex, but as a good rule of thumb would be to never forget to report income for any reason. If you fail to report the income and the IRS finds out, you will definitely get audited and you may also incur some sort of penalty.
#3 Putting down too many charitable donations on your return – While certain charitable donations are definitely deductible and there is nothing wrong with claiming the legitimate donations. However, if you have too many you will be risking the chance of being flagged for the audit by the IRS. Not being able to claim it on your taxes would not be a reason not to donate, that is still strictly up to you.
#4 Having too many losses on your return – The IRS does not like when you try to over claim losses in order to reduce your tax burden. Be sure that you keep your losses that you claim to a minimum as much as possible.
#5 Over claiming business expenses – When it comes to reporting business expenses you want to be sure that you can answer two distinct questions, is this an ordinary purchase and it is necessary for the type of work you are performing. Don’t take too many liberties with business expenses, the IRS will flag your return for audit for sure.
#6 Incorrectly claiming home office deductions – One of the biggest misconceptions there is that claiming all home office expenses is acceptable to the IRS. Unfortunately, you really need to be careful when it comes to your home office expenses. You want to only claim those things that you would be able to establish an ironclad expense to your business.
#7 Rounding up too much – The IRS really likes to deal in round numbers, however, you should always round down. Do not assume that they will let it slide, it is in your best interest to avoid an audit and rounding down is best.
When to get help with an IRS Audit
If you are audited by the IRS you are allowed to have representation. It is wise that the person you choose to represent you at the audit is someone who has some type of experience with tax law and even better past experience with IRS audits. There are a few Tax Resolution companies that offer to do this as a service.
It would be in your best interest if you have all of the information that you used to fill out your tax return with you when you make an appointment with them. They will be able to evaluate your case and determine what they will be able to do for you. They should also be able to go over the potential penalties that you could be up against in the event that they determine that there are any serious problems with your return.
Having someone represent you at audit may not necessarily guarantee a positive outcome, but there is far better chance that they will be able to negotiate a better outcome depending on the findings of the audit. If it is determined that there are any more serious issues with your tax return, there are a number of different types of penalties that you could be subject to.
What kinds of penalties can you face?
As we stated earlier, just because your return was selected for an audit does not necessarily mean that you did anything wrong, however, if during the audit they do find anything serious then you are subject to penalties and they can be severe in nature. There are four classifications of penalties that can be accessed by the IRS; Accuracy-Related, Civil Fraud, Fraudulently Failing to File and Criminal Charges.
Accuracy-Related – Inaccuracies such as understated taxes can result in a 20% penalty and in extreme case, it can be as high as 40%. There are several different degrees of severity that can determine what amount of penalties you could receive.
Civil Fraud – If it is determined that there was any fraud involved the IRS could impose a 75% of the federal tax that was owed.
Fraudulently Failing to File – This is actually a rarity, but there have been cases that the IRS has determined that a person failed to file a tax return in hopes to avoid paying taxes.
Criminal Charge – There are criminal type charges that the IRS could pursue, both misdemeanor or felonies. These types of penalties are also rare and really depends on the results of the audit.