Everybody fears the prospect of a tax audit. Fortunately, nearly nobody ends up getting one.
In 2021, only 0.2% of taxpayers earning under $1 million received an audit notification from the Internal Revenue Service.
based on the latest IRS Data Book
That’s approximately 1 person out of every 500.
People who undergo audits often commit particular yet frequent errors that catch the attention of the IRS. Below are three such mistakes to be aware of—along with steps you can take to steer clear of them.
1. You fail to disclose all of your earnings.
When you earn money from various sources, the IRS requires you to declare everything.
Any entity that gives you funds throughout the year—from bosses to investment companies—sends records like W-2 and 1099 statements right to the IRS. Should your tax filing not align with what the IRS has received, this mismatch might trigger red flags, notes Daniel Geltrude, a certified public accountant and the founder of Geltrude and Company LLC.
.
Geltrude mentioned that perhaps you missed seeing the 1099, but rest assured, the IRS has it,” she stated. “Since there’s now a mismatch, here we go.
A 1099 form indicates the amount of taxes you should pay based on income earned from freelancing, contracting, or gig jobs, as well as various kinds of one-off payments.
Several kinds of 1099 forms exist.
They function similarly to W-2 forms, except for one major distinction: A 1099 might be delivered to you sometime between mid-to-late February, making it arrive later compared to most W-2s. Employers must distribute W-2 forms by January 31st as mandated.
To ensure you report all your income accurately and completely, make sure to verify that you’ve obtained every 1099 form prior to filing your taxes with the IRS. You might need to reach out to your various income providers during tax season or maintain a record of all your income streams throughout the year.
2. You report significant or uncommon tax write-offs.
According to Geltrude, claiming excessively high deductions can lead to an IRS audit.
Common deductions
Include charitable donations, interest paid on student loans, or costs related to your side gig as business expenses. Still, if these figures seem out of place or constitute a large part of your earnings when reported, they might attract attention from the IRS.
“If you earned $100,000 and claimed a $70,000 charitable donation deduction, that would raise some eyebrows,” Geltrude informed SofTech.
It might also draw attention if your deductions abruptly appear unlike their typical appearance, as noted by Erica James, a certified public accountant, certified financial planner, and director.
Signify Wealth
, told
SofTechMake It last year
.
“She mentioned that substantial variations in your claimed deductions and credits over consecutive years might trigger an audit.” James added that if the deductions you claim are legitimate and thoroughly documented, an audit would probably result in a request for further evidence rather than a comprehensive examination.
To prevent problems with your deductions, the answer is straightforward, James stated: “Ensure you maintain proper records.”
3. You run a side gig or own a small enterprise but do not maintain proper documentation.
Entrepreneurs running small businesses and those with part-time ventures can
submit a Schedule C form
When filing their tax returns, individuals must report income generated from their business endeavors to the IRS. Although running a business or earning additional income can be an effective strategy to achieve one’s financial objectives, self-reported businesses frequently attract increased scrutiny from auditors.
“Every enterprise that earns revenue is under the examination of the IRS,” explains
Ed Slott
, a licensed Certified Public Accountant and the founder of
IRAHelp.com
.
As per Slott, the most effective method to assist yourself is
keep good records
Not only does keeping your business documents well-organized help you report precise figures during tax season, but maintaining this orderliness can also put you in favorable standing with the IRS should an audit occur.
According to Slott, simply maintaining all files pertaining to your enterprise within a dedicated folder can be an excellent initial step. Additionally, he suggests that if managing your taxes annually might interfere with running your business operations effectively, then considering the involvement of a tax specialist could be beneficial for organizing your company’s paperwork.
“If you comprehend QuickBooks and everything related to it, that shouldn’t be where you focus your efforts,” explains Slott. “Instead, you should dedicate your time to growing your business.”
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