Hearing about the possibility of an IRS audit makes many people uncomfortable. The thought of having to justify deductions and tax returns to the IRS is something that no one wants to have to deal with. If you want to avoid being audited, here are some of the top triggers for an IRS audit to watch out for.
1. High Deductions
One of the biggest triggers to an IRS audit is unusually high deductions. This does not necessarily refer to a high dollar amount of deductions but a percentage of deductions compared to your income. For example, if you make $200,000, the IRS will probably not be surprised if you have $40,000 worth of deductions. However, if you only make $60,000, they will throw up a red flag if you deduct $40,000. While there is not a specific percentage of income that they will allow you to deduct, this is just a general rule to be aware of.
2. High Income
If you have a high income, you are also more likely to be audited than someone with a low income. This does not mean that just because you have a high income, you are going to be audited. However, with individuals that have high incomes, there is more opportunity for them to hide income and use questionable deductions. The IRS wants to make sure that they are getting their fair share of your high income.
3. Cash Income
Another common trigger for an IRS audit is if you have cash income. For example, if you are a waiter or you work at a casino, there is a good chance that you are going to be bringing in a substantial amount of your income in the form of cash. Because of this, the IRS knows that there is a greater likelihood that you are not reporting all of the income that you bring in. In order to avoid any problems, you want to make sure that you keep detailed records of every dollar that you receive in the form of cash. This way, you will be able to easily provide records to the IRS if you are audited and avoid paying extra taxes.
If you are self-employed, the odds of getting audited increase exponentially. As a self-employed individual, there are multiple ways for you to hide your income and take extra deductions. Because of this, the IRS pays very close attention to individuals that file their taxes as a self-employed person. For example, if you claim a very large home office deduction, the IRS might want to check it out to make sure that it is legitimate. You will also want to make sure you keep receipts for any business expenses that you plan on deducting.
5. Income Discrepancies
If there are any discrepancies between the income statements that the IRS receives from your employers and from what you report on your taxes, this is a sure way to get audited. You need to report the accurate amounts of income that you bring in.
If you take the earned income credit, are you more likely to be audited?
The earned income credit is a tax credit offered by the United States government to help low-income families. If you take this credit, there is a higher likelihood that you will be audited by the IRS. The reason behind this is that there have been a number of fraudulent claims recently with this particular credit. Many people know that you can get more money with this credit if you say that you have a larger household than you actually do. This leads some people to claim children that are not theirs and increase the tax refund.
Will early withdrawal on a retirement account trigger an IRS audit?
In most cases, the fact that you take money out of a retirement account early will not necessarily trigger IRS audit proceedings. However, when you take money out of your retirement account early, this could make your annual income much higher than it was in the past. When you have high income, you are more likely to trigger an audit than if you had a lower income. The IRS looks for large discrepancies between your current annual income and your annual incomes of the past. If your income is much higher this year, the IRS will be more likely to take a look at your situation.