Being on the receiving end of an IRS tax audit can be scary if you don’t know what to expect or why you have been targeted. You wake up, go to your mailbox only to find a letter from the IRS with a warning sign. It isn’t the best way to wake up! Unfortunately, tax audits can come to those who have merely made a mistake when filing taxes, and this mistake has come back to shunt them. Luckily, there are some red flags to be aware of that, if known, will reduce the possibility of getting this notice in your mail.
What Is A Tax Audit?
An audit reviews a person or business’s tax returns and records to determine tax compliance and whether tax is owed. An IRS provides information to the taxpayer about the report’s outcomes, including a detailed description and the amounts owed. Luckily, if you are on the receiving end of an audit, there are things you can do. Tax audit defense companies specialize in giving you a helping hand when fighting your case. Most audits result from simple misfiling and nothing nefarious, and it can be challenging to know exactly how to rectify it. This is where these services come in. They often have expert knowledge about the tax system and can help you fix the audio and possibly remove any penalty. Nevertheless, the form of defense is offense, so knowing this, what are some red flags you can look for that should enable you to get your tax filing correct the first time.
Charitable Donations
You can lower tax contributions by donating to charity; this is a well-established method. Furthermore, the IRS encourages this by making it an easy deductible to perform. Nevertheless, the issue comes when you overestimate the cost of the items that you are donating. In general, there is an IRS rule that determines the value of things, and it is usually between 1% and 30% of the item’s original value. The majority of Americans are unaware of this range and overestimate or ignore the value of their donations (pro-tip: never disregard IRS advice).
What To Do Instead
Suppose you are unaware of what you think the value of your donated items is. In that case, you can have a professional appraisal performed along with a written letter from the appraising company. Even though this isn’t useful when donating clothing, it could be beneficial when contributing anything more valuable. Furthermore, it is required by law to get anything over the value of $5000 appraised.
Calculation Errors
There are many numbers to understand when filing taxes, so this is probably one of the most common mistakes. Most people are not qualified accountants and want to file their taxes as quickly as possible to get back to doing everyday things. However, you must spend some time getting your calculations correct.
What To Do Instead
This is an easy fix, but it takes time. If possible, do all of your calculations using a spreadsheet or something similar. This will enable you to see how things are being calculated on the fly. If you are a business owner and can afford the expense, hiring an accountant might be the best option.
Reporting Your Income Incorrectly
While this red flag could fall into the miscalculation point, it is a separate issue because it could be due to temptation taking over your mental faculties. Although it is highly tempting to under-report your income, you should avoid doing this like the plague. The IRS knows all of the tricks, and sooner or later, you will get caught. They can check your bank account and see if you have received a large amount of money from a cash transaction and will punish you accordingly.
What To Do Instead
Make sure all of your income is reported; it’s that simple.
Writing Of Any Losses That Occur From A Hobby
This is another temptation-based problem. You cannot use a hobby to write off losses. Even if you can get away with it for a few years, it eventually catches up with you. If they find out you are deducting losses made from a hobby, you will be in serious trouble.
What To Do Instead
Speak to your accountant and see what classifies as business and what is classified as a hobby. You can get better advice from them on this subject.
You can avoid tax audits if you follow some simple advice. As long as you don’t take too many liberties or miscalculate the numbers, you will be fine most of the time. The IRS wants what they are owed, and then they will leave you alone. If you find yourself in trouble, some services can aid you in fighting your case. However, the best option is to get it right the first time.
