Despite what may be believed in some circles, there is nothing inherently sinister about tax compliance audits. Indeed, being audited can be compared to a root canal or a colonoscopy, but it is supposed to be the federal government’s way of ensuring that everyone is playing by the rules and that individuals and businesses are truthfully reporting their income.
After all, there is a standard presumption that a tax return is completed and filed in good faith. When there are numbers suggesting that the presumption is being abused, the government has the right to investigate. Yes, there are random audits to ensure that taxpayers are following the rules, but some audits are triggered by abnormal activity.
This post will highlight a few red flags that could trigger an audit.
Mathematical errors – Yes, people are not perfect…even when using tax filing software to make calculations for them. However, huge errors could lead to an audit. Taxpayers must also remember that penalties from math errors will apply regardless of whether the errors were intentional.
Claiming too many charitable deductions – This is not to say that you should not charitable contributions to your favorite organization, but they should make sense given your income level. Someone who makes $40,000 and lists $25,000 in charitable deductions could be subject to an audit.
Reporting too many losses – You might be tempted to include personal expenses on your schedule C as a way to hide (or protect) income from your business. However, if you have too many losses, the IRS may want to know how you are still in business.
If you have questions about how to prevent an audit, an experienced tax attorney can help.