Although it's important to remember that audits aren't always personal, there are red flags you should know to help ward off investigation. Deductions, such as mortgage interest, business meals and entertainment, or even simply having a high income can trigger an audit. Once the IRS deems an audit necessary, there's little that can be done to get out of it. However, by keeping proper receipts and documentation to support your write-offs, you should be safe.
The IRS knows what to look for when deciphering an audit. For example, it's familiar with a standard teacher's salary, so if it sees that a teacher is making $200,000 a year, it is likely to look into the situation more closely.
Large charitable donations can also trigger an audit easily. If the donation is particularly large for someone in a given tax bracket, the IRS may decide to investigate.
Divorced individuals should pay close attention to how they deduct alimony payments. If there is a discrepancy between the two, that is grounds for an audit.
A common deduction often abused by self-employed individuals is the home office write-off. It is important only to deduct the designated space used to conduct business. Many self-employed people also deduct family vacations as business trips, which raises a red flag. If the write-offs are legitimate, by all means, use them. However, if you get audited and do not have the receipts and documentation to back up your story, you could be in serious trouble.
Knowing what to do if you do get audited by the IRS is just as important as knowing what possibly triggered it. Make sure you can provide at least the last three years of income tax returns and records. Keep your checkbook stubs, retain and categorize all receipts throughout the year, track property and taxable investments, file all bills, and record transactions as they occur. Also, you should be prepared to show whatever items are requested by the IRS. If the matters being discussed are too complex or you have questions, seek assistance from a certified public accountant.
Audits are in no way personal, and only occur if the IRS notices a reasonable discrepancy. Although audits are not a pleasurable experience by any means, there is no need to dread them if you've filed everything correctly.
If the IRS contacts you for an audit, be sure to schedule your appointment far enough in advance that you can prepare adequately. Preparation in itself helps eliminate the stress of an audit. Do not volunteer additional documentation, as you could be welcoming another investigation. If an agent ultimately decides that tax fraud has been committed, penalties vary based on the severity of the case. However, as long as you've been forthright, you needn't worry.
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