Common Causes of Audits
The most common cause of an audit is the failure to report all taxable income. This includes interest, dividends, stock sales, 1099 miscellaneous income, etc. It is common for business owners who receive more than one 1099-MISC for their services to fail to include the income from a 1099-Misc. The business owner may misplace a 1099-MISC, it may get lost, or the sender can mail it to an incorrect address. If you are not sure that you have reported all of your income, I would recommend filing an extension and requesting a Wage and Income Transcript from the IRS. You can also have your tax professional get your transcripts from the IRS. They can call the Tax Practitioner Hotline and get your transcripts in minutes. The transcript will provide you with all of the income that has been reported to the IRS. The IRS doesn’t care if you file an extension. If you inadvertently omit income on your tax return, the IRS can penalize you. You may have to pay an accuracy-related penalty of 20% of the underpayment, and penalties for fraud are 75% of the tax due. It is better to file an extension and prepare your taxes correctly than to rush and file incorrectly before April 15.
An angry spouse, business partner, employee, family member or friend can turn you in. I have seen this happen before. Moreover, when they have this knowledge about you, the IRS knows exactly what to audit.
Not filling out your return completely can cause an audit. All tax returns are scored. If you don’t completely fill out your return, this will increase your score and chance of being audited . An example is not completely entering the address of a daycare provider. Be sure to completely fill out your return.
Large amount for travel and entertainment is likely to draw attention from the IRS. Be careful about taking a large amount for this deduction.
Having a business with too many years of losses will draw attention from the IRS computers and they can easily monitor this. The IRS may want to rule the business as a hobby and disallow the previous year’s losses.
Rounding your numbers to zero will increase your chances of an audit. For example, if your property tax is $898, don’t round it $900.
Any large deduction relative to the national average for your income level is likely to increase the chances of being audited.
Failure to file your returns increases your chances of being audited.
Having previous issues with the IRS will increase your chance of being audited. If you have had previous IRS issues, keep this in mind when preparing your tax return. This includes having your taxes in collection.
Using unscrupulous and fraudulent tax preparers will increase your chances of being audited. When the IRS finds these tax preparers, they typically review all of their client’s tax returns for cases of tax fraud.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org