Vrakas CPAs, Here Are Your Articles for Wednesday, May 11, 2022
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9 Ways To Avoid an IRS Audit

 

While you cannot fully control whether the IRS audits you come tax season, there are measures you can take in an effort to lower your chances of being audited. It all starts with hiring a reputable tax accountant. If you prefer to file your own taxes, make sure you are diligent and extra careful. But what does this mean? Basically, you should avoid making the following common mistakes that tend to result in an audit from the IRS.

Making data entry errors

When you transfer any amount of data from one location to another, you run the risk of improperly copying numbers, inaccurately inputting data points, and making mistakes regarding your calculations. It is important to be as specific as possible when adding, subtracting, multiplying, or dividing digits as you perform data entry. Instead of rounding numbers, be as exact and as precise as possible.

Failing to report all of your income

The IRS receives its own copies of every income reporting form that you receive, including form W-2 and form 1099, as well as alimony-related forms and your K-1s, which entails any income, losses, interest, or dividends that you accrue as a result of your business. Information pertaining to foreign bank accounts is also accounted for by the IRS. 

If you fail to report any of your income sources, you run the risk of being audited by the IRS, even if the omission happened by accident. Whether it’s income from a full-time job or a part-time side gig, all of the money you earn must be reported. 

The IRS often looks at your income from one year to the next, so any discrepancies that are spotted will pique the interest of the IRS, which may lead to an audit.

Misrepresenting your deductions 

Overestimating how much money you can deduct from your taxable income is a dangerous game to play. From charitable deductions and business expenses to home office deductions and other potential tax breaks, claiming too many deductions can ultimately be a red flag to the IRS. 

This is especially true if your deductions are substantially higher this year than they were in prior years. Be honest about your charitable contributions, the size of your home office, and other specifics pertaining to any and all tax deductions that you claim. When possible, obtain and hold on to receipts that you can provide to the IRS in the event that you are audited as a result of the deductions you are claiming. 

If you claim a variety of deductions when filing your taxes, you are automatically at risk of being audited because deductions often draw attention to you. Be sure that any deductions you claim can be proved with documentation in the event that you are selected for an audit. 

Choosing the wrong filing status

It is imperative that you select the proper filing status for yourself and your circumstances. With the help of a reputable tax professional, you can ensure that you are making the right selection. If you change your filing status in a way that is drastically different from your prior filing status, you might cause heads to turn at the IRS. 

For instance, if you're recently divorced, but you try to claim head of household or single for the year you were still married, the IRS will likely investigate. There are different filing status options for a reason, so make sure you select the status that is accurate for you. 

Falsely claiming dependents 

It might seem easy to claim dependents, but there are various circumstances that must apply before you can do so. Claiming children that you don’t actually have or saying you have dependents when you don't will be viewed as pure deceit. Instead of getting into trouble with the IRS, be honest about your dependents. While mistakes can happen, especially in the event of confusion caused by child custody, the IRS is not always forgiving of accidents, so the fewer you make the better. 

Wrongfully claiming the Earned Income Tax Credit

The Earned Income Tax Credit was put in place with the intention of assisting households that have low-income levels. The IRS is adamant about making sure only the households that legitimately qualify are able to take advantage of this credit opportunity, so before you claim the Earned Income Tax Credit, double-check your eligibility with an experienced tax adviser.

Exhibiting strange behavior when self-employed 

The IRS keeps a watchful eye on the self-employed because self-employment taxes can be quite complex. If you are self-employed and you either fail to acknowledge that you’ve made a profit or claim that you are not profiting from your self-employment activities, then the IRS may be skeptical of the legitimacy of your self-employment deductions. 

Reporting drastically different information than your employer

If you happen to be a shareholder in a corporation of any kind, be mindful of the fact that the IRS will likely compare your tax return to the information reported by the corporation. If your information does not line up with theirs, the IRS might investigate to figure out why there are discrepancies between you and the other party. 

Keeping inaccurate records

Make sure you maintain accurate records that you can reference when it comes time to file your taxes each year. 

When you are intentional and honest about your taxes, there is nothing to worry about. The odds of you being audited will be slim, but even if you are selected for an audit, the IRS will likely see upon further investigation that there is no reason to be concerned. As always, there is no way to be sure that you’re safe from an audit, but if you are audited by the IRS, try not to panic. Instead, contact a tax professional and seek advice from him or her.

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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