A tax audit by the IRS (Internal Revenue Service) is a review of a taxpayer’s financial records, tax returns, and other documentation to ensure that they have reported their income and expenses accurately and paid the correct amount of taxes owed.
Tax audit IRS can be conducted for a variety of reasons, including a random selection, suspicion of underreporting income or over reporting deductions, or participation in certain tax avoidance schemes.
5 red flags that can trigger tax audit
1. High income:
One of the most significant red flags that can trigger a tax audit is if you have a high income compared to other taxpayers in your income bracket. If you earn a lot more than the average person in your income category, the IRS may investigate to ensure you haven’t made any errors or engaged in any fraudulent activities.
2. Unreported income:
Not reporting all your income can lead to a tax audit. The IRS cross-references the information provided by your employer, banks, and other financial institutions against your tax return. If there is a mismatch, it can raise suspicion and result in an audit.
3. Claiming too many deductions:
Claiming too many deductions or claiming deductions that are not valid can raise a red flag. Be sure to double-check your math and make sure all your deductions are legitimate and can be supported with proper documentation.
4. Running a small business:
Small businesses, especially those that are cash-based, are more likely to be audited. If you own a small business, ensure that you keep accurate and detailed records to back up any deductions you claim.
5. International transactions:
International transactions, including income earned abroad or foreign bank accounts are highly scrutinized by the IRS. If you have any foreign income or assets, be sure to disclose them on your tax return and file the appropriate forms to avoid triggering an audit.
It is important for taxpayers to keep accurate records and report their income and expenses correctly to avoid the possibility of a tax audit. If a taxpayer is audited, they should work with a qualified tax professional to help them respond to the IRS’s requests and resolve any issues that may arise.