Thousands of Americans receive audit notices from the Internal Revenue Service each year, some more serious than others. However, many people who go over their documents closely with a tax preparer, file on time and pay their liability are confused when they receive correspondence from the IRS. The truth is, individuals can do everything right on their tax forms, while still triggering the attention of the IRS. This is because there are certain "red flags" that may prompt an inquiry.
Understanding these scenarios can actually help individuals better prepare for potential audits by keeping more active records and knowing how to respond quickly and efficiently. For example, one of the most common triggers of an audit is a home office deduction. While this write-off is perfectly legal and encouraged for those who truly qualify, there is a lot of wiggle room in the deduction, which is why the IRS scrutinizes it so closely. To lower the risk of an audit, those who work from home should discuss the qualifying criteria of the office deduction with their tax professional to ensure they fall within the parameters.
Other deductions may trigger an inquiry
In addition to writing off home office expenses, claiming excessive charitable contributions can also pique the interest of the IRS. Again, it's important to keep adequate documentation each time individuals are generous with their money or assets, as being able to demonstrate the validity of claimed amounts can make the auditing process go by much faster. Also, different types of charitable contributions may call for different types of documentation. For instance, making small cash payments to a foundation may require less documentation than if someone gifts a vehicle or other high-priced asset to a group.
Although income in and of itself may not trigger an audit, it can play a role if a person's lifestyle and earnings do not match up. For instance, workers who own a home in an upper-scale neighborhood and claim $20,000 in property taxes but only report income of $40,000 on their tax returns are likely to be audited. The IRS will examine deductions and reported income to help them narrow down individuals who may not be reporting all of their income.
Taxpayers should try not to panic if they receive an audit notification from the IRS, as these may be more common than people think. A licensed professional can help individuals both ensure the accuracy of their tax forms and guide them thought the audit process.
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