When it comes to filing your taxes, accuracy is key. One mistake or oversight could lead to a tax audit, which can be time-consuming and stressful. A tax audit is when the Internal Revenue Service (IRS) reviews your tax return and financial records to determine if they are correct. The IRS may flag a return for various reasons, including inaccurate reporting of income, claiming suspicious deductions, failing to report foreign assets or income, and not keeping adequate records. Here’s a closer look at each of these reasons.
Inaccurate Reporting of Income
One of the most common reasons the IRS may flag a return (Initiate Tax Audit) is for inaccurate reporting of income. The IRS uses W-2 forms and 1099 forms to verify the income you report on your tax return. If the information you provide doesn’t match the information reported by your employer or financial institution, the IRS will likely flag your return for further review.
Common mistakes in reporting income include not reporting all of your income, misreporting the amount of income received, or failing to report income from freelance work or side hustles. To avoid these mistakes, make sure you have all of your income-related documentation in order and double-check your numbers before you file.
Claiming Suspicious Deductions
Another reason the IRS may flag a return (Initiate Tax Audit) is for claiming suspicious deductions. While deductions can help lower your taxable income, they must be legitimate and supported by documentation. Common deductions that are often flagged include unreasonably high charitable contributions, business expenses that are not ordinary and necessary, and large deductions for items such as car expenses or meals and entertainment.
To avoid claiming suspicious deductions, make sure you have receipts or other documentation to support your deductions. If you’re unsure whether a deduction is legitimate, consult a tax professional.
Failing to Report Foreign Assets or Income
The IRS takes a close look at foreign assets and income, and failure to report them could result in a tax audit. If you have a foreign bank account, own foreign stocks or other investments, or receive income from foreign sources, you must report it on your tax return.
Common mistakes in reporting foreign assets and income include not reporting all of your foreign accounts or failing to report the correct amount of foreign income. To avoid these mistakes, make sure you have all of your foreign-related documentation in order and consult with a tax professional if you’re unsure about how to report your foreign assets and income.
Not Keeping Adequate Records
Finally, not keeping adequate records is another reason the IRS may flag your return (Initiate Tax Audit). Adequate records include receipts, invoices, and other documentation that support the information you report on your tax return. If you can’t provide adequate records, the IRS may disallow your deductions or increase your taxable income.
To avoid this, make sure you keep all of your records organized and in a safe place. If you’re self-employed or run a small business, make sure you keep detailed records of all of your expenses.
In conclusion, accuracy is key when it comes to filing your taxes. By avoiding the four reasons the IRS may flag your return, you can reduce your risk of a tax audit. If you have any questions or concerns, consult with a tax professional. They can help you navigate the tax laws and ensure that your return is accurate and complete.