The October 17th deadline for filing your 2021 tax return is nearing. This deadline applies to taxpayers who filed for an automatic extension this past April. For anyone who did not file an extension, the sooner you file the lower your interest and penalties will be for filing late.
And with the October 17th deadline approaching, let’s review the top ten red flags that might trigger an audit by the IRS. As you read this list of audit red flags remember that if you are entitled to deductions you should take them. Don’t let the fear of an audit keep you from claiming legitimate deductions and credits. Also, remember that the overall chance of being audited by the IRS is less than 1 in 100.
Should you really be worried about being audited by the IRS? Overall, only about 1% of tax returns are audited each year. So if you’re a gambler, the odds of being picked for an audit are pretty slim. But there are red flags that can make your tax return stand out and dramatically increase your chances of an audit. Here are the red flags that could put you at the head of the line for an audit.
THE TOP TEN RED FLAGS THAT COULD TRIGGER AN AUDIT
#1 If the IRS thinks you are claiming too many deductions or you’re failing to report all your income you could be flagged. Remember that the IRS gets copies of your W2, W2G and 1099 statements and these are stored in the IRS computers. The IRS will compare your return to the reports it receives. The IRS also compares returns of taxpayers like you and if your deductions are too big the IRS will want to know why.
#2 There are math errors on your tax return. While most math errors won’t result in an audit, errors in favor of the IRS will most certainly result in you getting a bill.
#3 You failed to report income on tax forms like 1099s and W2s. The IRS gets copies of those forms that are sent to you. Yes, this is part of the first red flag which shows you just how important it is that you don’t overlook or try to hide any income reports.
#4 Too many deductions than other taxpayers like you. So you stand out from the crowd. Yes, this sounds like the first red flag again — and again it’s because it is very important.
#5 If you deduct too many miles on your vehicle for business use. Keep an accurate log of your mileage not only for business but also for medical purposes and for charity. The mileage deductions went up in July of 2022 so each mile is worth more to you. Be accurate in what you claim and have a record.
#6 You have a cryptocurrency account and you fail to report your transactions. The IRS is now very serious about getting its share of cryptocurrency profits. In fact, you now have to reveal to the IRS even if you own cryptocurrency whether or not you bought or sold it during the year.
#7 If you have a cash business you could be flagged for an audit. Cash businesses and cash transactions are always suspect.
#8 If you claim the Earned Income Tax Credit you could be audited because the IRS wants to be assured you’re entitled to the tax savings. This is why lower income taxpayers have a relatively high IRS audit rate.
#9 Self-employed taxpayers could be flagged for an audit because they may have lots of deductions.
#10 If you deduct a home office you could be flagged for an IRS audit. The IRS is always looking for abuse of deductions. When you deduct more than a room the deduction can come into question.
DON’T BE AFRAID OF JUSTIFIED DEDUCTIONS
Those are the top ten reasons and red flags for an IRS audit. But don’t be afraid to claim deductions and tax breaks that you are entitled to. Proper record keeping and receipts are always your best defense in an audit.
If you are still not sure what to deduct, or if have you received an audit notice, it’s always best to consult with a tax professional about your next steps. You also might want to ask about ways to resolve your IRS tax debt and if you are eligible for an IRS Fresh Start or an IRS Offer In Compromise.
ABOUT THE IRS FRESH START
We offer a free telephone consultation about the IRS Fresh Start Program and the IRS Offer In Compromise Program and your other tax issues including an IRS audit. In 15 minutes or less, one of our tax resolution specialists can tell you if you might qualify for the IRS Fresh Start Program, which includes the Offer In Compromise Program. This video explains how easy it is to have this 15 minute consultation with us.
Here again is the direct phone number to call our senior tax resolution specialist Tom at our office: 949-359-0810
Or, you can call our general number on this page to reach any of our tax resolution experts about the IRS Fresh Start Initiative or the IRS Offer In Compromise, and for guidance if you are facing an IRS audit or think you might be facing an audit. And, if you are having trouble preparing your 2021 tax return before the October 17th deadline for extensions, we can help you with that also.
And remember, you don’t have to go through an IRS tax audit alone.