A tax error could result in an IRS tax audit, even though the likelihood of taxpayers getting audited has recently decreased due to taxes growing more complex yearly. Preventing “red flags” like those in the list below may be beneficial, along with contacting a CPA firm in Poughkeepsie, NY.
- Reclaiming business losses annually.
The IRS presumes you run your business for profit when you operate it and submit Schedule C. The IRS becomes suspicious when someone claims yearly losses without making a profit.
- Failure to report form 1099 income
When you are self-employed or hold a second job, resist the urge to declare your income below what it is. The IRS obtains the very same 1099 forms as you do, so even if you believe you should have received a Form 1099 at a particular time but did not, you cannot be certain the IRS did not as well. If the IRS discovers a discrepancy, you will be informed.
- A retirement account early withdrawals
Generally, there is a 10% penalty if funds are taken out of a retirement account earlier than age 59 1/2. If you do not meet an exception, you will also be responsible for paying income tax on the sum withdrawn. These early withdrawals can occasionally — but not always — result in an audit, usually a correspondence audit in which the IRS writes you a letter.
- Overly high business tax deductions
Excessive business expenses include those that are out of proportion to your earnings and type of business, such as taking too many deductions, using a car exclusively for work, or inflating business-related dining, travel, and leisure costs. Always keep your receipts and track your travel costs and distance.
- Not reporting winnings or suing for significant gambling losses.
Professional gamblers disclose their gains and losses on Schedule C, Profit or Loss from Business. They may also deduct expenses like housing and meals connected to their work line. Form W-2G, which would be given to the IRS, asks for information about gambling profits.
As a result, you need to disclose this revenue. Gambling losses are allowable deductions, but you must categorize them on Schedule A (Form 1040) and keep track of your winnings and losses. Regular taxpayers (recreational gamblers) disclose their income and losses on Schedule 1 of their Form 1040 tax return under “Other Income.”
How to respond to an audit?
Do not attempt to manage it yourself if you have gotten letters from the IRS in the U.S. mail indicating that you are being audited. Make sure to contact a CPA instead.