A tax audit can occur for several different reasons that most people are not aware of. You will have to comply with at least two of these factors before you have anything to worry about.
The most popular reason for a tax audit is unreported income. Here, there is a lot of paperwork that must be filled out and completed. When the paperwork contains errors or does not get turned it at all, issues can start to occur. This type of paperwork is also time sensitive and should be received in order to file by January 31st.
Improperly prepared tax returns are the second most common reason for a tax audit. In the event that your tax forms are filled out or filed incorrectly, this will definitely have the IRS breathing down your neck. In this case, many people decide to round numbers or estimate amounts when it comes to their deductions. When information is repeatedly misrepresented and estimated, the IRS may view this type of activity as a red flag.
A drastic increase or decrease reported income can raise a few eyebrows within the IRS. When income amounts fluctuate a great deal, whether it is an increase or decrease, this could insinuate that somewhere along the line, income was not reported. Taxpayers may also be tempted to hide assets such as bank accounts but in many cases, the IRS can find out.
Income that is not enough to support the individual’s current lifestyle can also become an interest of the IRS. If you report things, such as a mortgage or other type of tax on property but do not show income that can represent proof of these allegations, this may pose additional issues.
Claiming charitable contributions can also get you into trouble with the IRS. Some may claim to have given a specific amount but the IRS may look for documentation to prove your contribution. The IRS provides information on how to properly report charitable contributions. A safe percentage in this case would be anywhere from 2% to 5%.
If you are claiming business expenses, make sure expenses are business-related. Many taxpayers have reported expenses that have turned out to be personally related. Also, keep in mind of purchases made with business funds but have been used for personal reasons. Be sure to document expenses such as travel and equipment purchases correctly in order to obtain the proper credit.
Andrew writes frequently about personal finance as well as issues effecting both consumers and small businesses, covering everything from credit cards to mortgages to how to setup an umbrella company.
- Seven Great Ways to Get an IRS Audit. (2008taxes.org)
- 2011 Rules for Charitable Contribution Deductions (2011taxes.org)