You can’t completely eliminate your risk of being audited by the IRS. However, some taxpayers are more likely to being audited than others. If you have a higher audit risk, make sure you double-check your numbers and have your supporting documentation ready in case the IRS examines your return.
Reason #1: Very High Income
A higher income may give you more opportunities to take certain deductions and credits. You’re also generally going to be in a higher tax bracket, so the IRS has more to gain if they find any discrepancies on your return.
Hire a tax professional to prepare your return and take steps to legitimately reduce your tax burden. If you receive an audit notice, at least you’ll be prepared.
Reason #2: Income Discrepancies
The IRS receives a copy of every information return you receive, including W-2s and 1099s. If you receive many different 1099s, it can be easy to forget to include one on your return.
IRS computer systems can easily catch these errors. You may receive a notice that your return is going to be adjusted, but the IRS could also decide to see if there are other errors on your return.
Reason #3: Business Losses
The business loss rules are complex and vary based on your choice of business entity and other factors. One area that’s changed since the passage of the Tax Cuts and Jobs Act is the hobby loss rules.
Under prior law, hobby deductions could only be taken to offset hobby income. Now hobby deductions are totally disallowed, but you are still required to report all of your hobby income.
Reason #4: Disproportionate Deductions
You should have receipts to back up all of your business deductions. You also need to make sure that they are “ordinary and necessary” business expenses.
If your Schedule C deductions are a large percentage of your income, the IRS may confirm the validity of your deductions.
Reason #5: Major Changes from Prior Years
If your income has consistently been at $200,000 and suddenly drops to $40,000 this year, it may raise some red flags. Big changes do happen, especially if you had a medical issue or some other major event that disrupted your business.
Don’t panic if your return has some red flags that may increase your audit risk. Make sure you’re following the tax laws and have the documentation to back up your income and deductions. If your return is selected for an IRS audit, contact a tax attorney for assistance.
The Gartzman Law Firm can help you with tax audits and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.