Understanding Financial Considerations

Posted on: 29 July 2014

It's every tax payer's worst nightmare: being audited by the Internal Revenue Service (IRS). Fortunately, tax audits these days are less common than ever before, so your chances of being chosen for an audit are quite slim. Still, there are some "red flags" that the IRS tends to look for when selecting tax returns for auditing. Read on to learn about which mistakes you'll want to avoid to protect yourself from a tax audit.

Overlooking Income

The most common reason for a person to get audited is failure to report taxable income. Often, this is a simple enough mistake; perhaps you forgot about the couple of freelance gigs that you took on earlier in the year, or maybe you accidentally failed to report the money you made off of selling that old baseball card collection. Either way, if you fail to report any taxable income and the government finds out about it, you're going to get audited. Keep detailed records of all of your income throughout the year to avoid this possibility down the road.

Being Too Generous

If you're the type of person who enjoys contributing to charities and helping those less fortunate than you, that's great. However, your selflessness can actually get you in trouble with the IRS. You see, they have algorithms to determine about how much you should be expected to donate in a given year based on your income; if you donate above their prediction, this could raise suspicion that you're looking to claim unwarranted tax deductions. As a result, the IRS will be more likely to audit you. It's unfair, but it's true.

Business Write-Offs

While you're certainly entitled to some write-offs, there's a fine line between what the IRS considers reasonable and frivolous. For example, it's generally fine to write off small equipment and supply expenses here and there, such as a new laptop or an order of business cards. However, if you begin deducting expenses from large, fancy business lunches and travel expenses to a "conference" in Tahiti, there's a much better chance that you'll end up getting an audit notification.

Being audited can be stressful--and if you ever do get a tax audit, it's important to hire a tax attorney as soon as possible. However, by avoiding these "red flag" actions when tax season rolls around, you shouldn't have to worry about the possibility of being audited by the IRS. For more information, contact Kevin S Hughes CPA or a similar tax preparation professional.