An IRS audit can be a stressful and time-consuming experience. While audits are relatively rare, they can still happen, and it’s important to take steps to minimize the risk. Proper financial planning and being aware of common red flags can help you avoid triggering an audit. Here are some red flags to watch out for and tips on how to keep your tax filings in good standing.
Inconsistent Income Reporting
One of the most common audit triggers is inconsistent income reporting. If your reported income doesn’t match what the IRS has on file from employers or other sources, it could raise a red flag. Ensure that your income from all sources is accurately reported on your tax return. Double-check for any errors, and keep good records of all income received.
Large Deductions Compared to Income
Claiming large deductions compared to your income can also attract unwanted attention. While you are allowed to claim legitimate deductions, extremely high deductions in relation to your income may be scrutinized. It’s important to maintain proper documentation for all deductions, from business expenses to medical costs, to ensure that they are legitimate and well-supported.
Failing to Report All Sources of Income
Whether it’s freelance work, side gigs, or investment income, not reporting all sources of income is a major red flag. The IRS receives information from various third parties, including banks and employers, so they can easily compare the data. Always report every form of income, even if it seems minor.
Overstating Charitable Donations
Charitable donations are a great way to reduce your tax liability, but overstating these donations can trigger an audit. Be sure to keep detailed records of your charitable contributions, including receipts and the value of donated items, especially if your donations are substantial.
Unusual Business Expenses
If you’re self-employed or run a business, make sure your business expenses are reasonable. Claiming personal expenses as business expenses can be a red flag for the IRS. Proper financial planning can help you distinguish between personal and legitimate business-related expenses, ensuring that only allowable deductions are claimed.
By being mindful of these potential red flags and engaging in diligent financial planning, you can significantly reduce the likelihood of an IRS audit. Always ensure that your tax filings are accurate and well-documented to avoid unnecessary scrutiny.