Some people, dare we say it, look forward to tax season. Why? Well, they might use a tax return to pay off debt. However, not everyone is so lucky to receive a tax return; they could owe money, or even have their return flagged by the IRA
An IRS audit is something that occurs if the IRS decides there are irregularities with your tax return they need to review. It does not necessarily mean you tried to do something illegal or unethical. It could happen simply because you made a mistake.
Still, you want to avoid a situation where the IRS flags your tax return and decides to audit you. We’ll go over some reasons that might draw their attention to your particular return. If you know about these potential issues, you can take steps to avoid them.
Deductions and Credits
Using legal tax credits and claiming deductions are both tactics most people use when they file their taxes each year. It makes sense to take advantage of any available credits and list deductions as they can reduce your tax burden. You’ll have a better chance of either paying less in taxes or getting a refund if you go this route.
However, the IRS might look at your tax return more closely if you seem to be taking too many credits or claiming too many deductions compared to how much money you made during a calendar year.
The IRS has proprietary software that looks at tax returns and comes back with a numeric score. Higher scores are more likely to trigger an audit. A score will be higher if the income you report is not much more than the value of the deductions and credits you’ve used. If you understand this, you’ll know not to go overboard in this area. As always, honesty is the best policy.
You’ll want to keep track of write-offs you can claim throughout the year since you can use those during tax season to reduce your taxable income. For instance, you might use the earned income tax credit if you don’t make a ton of money, which will enable you to get a refund and have zero taxes due.
If you’re self-employed, though, and you try to take the earned income tax credit, it could cause the software the IRS uses to flag your return. This isn’t saying you can’t claim the credit, but if you do, make sure you keep careful receipts for all the income you made.
Also, if you’re self-employed, you should be careful about writing off things like a home office or vehicle. You can write those off only if you use them for business purposes. And not too many individuals who work from home can say that.
Watch Out for the Areas We Mentioned
If you know what areas the IRS is likely to focus on when looking at your tax return, you can probably avoid an audit. If you’re self-employed, only write off a home office or vehicle if you use it exclusively for business reasons. If you take the earned income tax credit, make sure you have receipts or other documentation to prove the income you made.
You should usually take any deductions and use any available credits, but don’t claim any that are untrue. If your credits and deductions come close to the amount of income you brought in, don’t be surprised if the IRS comes knocking at your door.
Try to have documentation in the form of receipts or any other proof having to do with the income you made and any business-related expenses you have. That way, you can show those to the IRS in the off chance they audit you.