An Arizona attorney discusses what might trigger a tax audit
Tax audits are rare. About 0.5 percent of all tax returns received IRS scrutiny in 2016, according to irs.gov. But that's still over 1 million returns. While audits don't happen often, many taxpayers wonder if they've done anything that might trigger a letter or visit from an IRS agent.
The IRS conducts audits to determine that a person or organization has reported their financial information correctly and in accordance with the tax laws. Any taxpayer can be audited by the IRS, but the government looks for certain red flags. According U.S. News & World Report, people with high incomes are more likely to face an examination, or IRS audit, than those who earned less.
But there are several other potential audit triggers. The following is a breakdown of some of the top reasons listed by U.S. News why the IRS might audit an individual or organization:
Actions that might get you audited
- High income: Individuals who earned between $200,000 and $1 million faced an 0.8 percent chance of being audited in 2017. For business owners, the rate was 1.6 percent. Individuals who earned more than $1 million were audited a 4.4 percent rate.
- Failure to report cryptocurrency: If bitcoin was part of your income, you must report it.
- Failure to report taxable income: If you've worked any side gigs, you should have received a 1099 form. You'll need to report the amount to the IRS.
- Errors on your tax form: Be sure to double-check your math when completing the forms.
- Self-employment: The IRS has audited self-employed individuals at a higher rate than those who work for others. It's wise to keep good records if you're self-employed, especially when claiming tax deductions.
- Three back-to-back years of business losses: Consecutive-year business losses may result in the IRS asking if your business is really a hobby. Unlike a business loss, a hobby loss is not deductible.
- Use of round numbers: The IRS might question if your expenses are rounded to the nearest dollar. Specific numbers and good recordkeeping are the best practices.
- Deducting 100 percent of your car for business use: The IRS knows that almost no one uses a car 100 percent of the time for work. A commute from your home to the office, for example, is not deductible.
- Large deductions on a small salary: The IRS might scrutinize your return if you claim big deductions and report a small salary.
What to do if you get audited
Even if you triple-checked your work on your taxes and kept excellent records, you still could be audited. Some of the IRS audits are random. If you receive notification of an audit, you should call an experienced attorney at Brown, Naegle, Crider & Jensen, LLC.
Contact us today to find out how we can help you.
Arizona tax attorney Shad M. Brown has audit experience on both sides. He worked for the IRS before entering private practice. He knows how to help clients get the outcome they need if the IRS decides to scrutinize their tax returns.