When the IRS decides to give your tax filings a deeper look, they will send a letter indicating you have been selected for audited on either your personal or business tax returns. They will also request information that could span a couple of years. Good thing you held onto copies of your returns for 7 years.
If you've ever experienced a tax audit, it's likely you would like to avoid having to go through the process again. But if you haven't, you will still want to avoid sending a red flag to the IRS, if you can. In some cases, it's just inevitable. Have you ever wondered what flags the IRS?
Top red flags for audit
1. High income: The term high income can be somewhat subjective. However, according to the IRS, a high income consists of anyone earning over $200,000.00. If your return shows income over that amount, you have a 4 percent higher risk. Why? Because the IRS is more likely to gain a payoff for their efforts.
2. High charitable donations: If you make an unusually large contribution or multiple small donations that add up to a larger than usual sum, the IRS may take a closer look at you. Generally speaking, if you keep your donations approximately the same and under 30 percent you will be less likely to trigger the IRS's attention.
3. Business accepts cash: If you own a business that is largely based on cash payments, especially if it's combined with a large income, you are more likely to be noticed by the IRS. Keep accurate records to prove your business is not hiding revenue.
4. Missing income: When you receive income from an employer or someone you contract with, they will send you a W-2 or 1099 at the end of the year. The IRS will also get a copy. If your tax return shows an income less than what they calculate, they may decide it's time to take a closer look.
5. Self-employment deductions: Typically, if you do not have a separate space specifically designated as your home office but take a deduction, the IRS may audit. Additionally, if you continue to have losses after three years as a small business owner, the IRS will suspect your job is actually just a hobby, which means your expenses are not tax deductible.
There are no surefire ways to know if you will be audited, but being honest on your returns will reduce potential liability for penalties. A number of financial sites can guide you through calculating your risk if you are concerned. Otherwise, discussing your options with an attorney who is experienced with tax law is another option available to you. Good luck.