Typically, the average taxpayer rarely gets audited. Although most people fear being audited, the reality is that the IRS only flags about 1% of tax returns for further investigation.
While more than half of the taxpayers flagged for auditing make $1 million or more a year, and most of us fall well below that amount, some instances could trigger an audit for the average taxpayer. Let’s take a look at some of the most common reasons the IRS may want to take a closer look at your tax return.
- Your Business Does a Lot of Cash Transactions
If your business does a lot of cash transactions, it might trigger the IRS to pay special attention. This is because it’s easy to forget to declare income of a cash nature, and it’s difficult to track as there are no paper trails for cash.
Gas stations, laundromats, and restaurants are a few examples of businesses that may be audited because of the cash business they do. If you do a lot of cash business, you may want to begin interviewing tax agents to help keep accurate records. That way, you’ll be prepared if the IRS singles you out for an audit.
- Filing a Tax Return with Math Errors
If math isn’t your strong suit, you may want to consider letting a tax professional do your taxes for you. Otherwise, you can use tax software instead, which should eliminate mathematical errors. Filing a tax return with addition or subtraction errors could cause the IRS to pay closer attention to your return.
- Filing a Schedule C for Self Employment Income
Honestly, there isn’t much you can do about this trigger since anyone who works for themselves will need to file a Schedule C to report their profits and losses. Unfortunately, filing this form automatically makes you more likely to be audited. The best thing you can do is make sure you have all the documentation to back up any claims you make on this form.
- Taking the Home Office Deduction
These days, many people work from home. Fortunately, if you work from a dedicated home office, you may qualify to take the Home Office Deduction. Unfortunately, taking this deduction may cause the IRS to question your claims.
The best thing to do in this situation is to figure out the deduction and decide if it saves you enough money to take the risk.
- Consistently Claiming More Losses than Profits for Several Years in a Row
Some people think it’s okay to deduct expenses for their hobbies, claiming them to be the result of running a legitimate business. To run a legitimate business, however, your company should show a positive profit margin for the majority of months in the most recent years. If it doesn’t, the IRS may require you to verify the validity of your business. If you’re consistently operating at a loss, be sure you have records to back up your claims to satisfy the IRS should they come knocking.
- Failing to File a Return
If you fail to file a return for some reason and then file again a year or two later, the IRS will question why you didn’t file a return in the years you missed. Filing an incomplete return can result in the same issue. Make sure to finish your return in its entirety, and don’t forgo filing a return for any reason.Although the average taxpayer rarely gets audited, certain circumstances may trigger the IRS to take a closer look at your return. Keep good records and complete your return on time to avoid being audited.