IRS Audit

IRS AUDITS

“BEING AUDITED BY AN IRS IS A COMMON FEAR AMONG PEOPLE, AND IT WILL MAKE YOU RECONSIDER YOUR TAXES.”

WHAT IS AN IRS AUDIT?

                       An IRS audit is an examination of an organization’s or individual’s accounts and financial information to make sure the information reported correctly according to the tax law to substantiate the reported amount of tax is accurate. 

WHAT ARE YOUR RIGHTS?

                       As a taxpayer, you have to right to the examine, appeal, collection, and refund processes are explained by ‘Your rights as a taxpayer- Publication 1’. These rights involve:

  • A right to polite treatment and professionalism by IRS workers
  • A right to top-secret and privacy about tax details
  • A right to know why the IRS is inquiring for the information and how the IRS uses it. Plus, what will happen if the requested details /information is not provided
  • A right to reconsider disagreements, both within the IRS and before the courts. 

WHY THE IRS AUDITS PEOPLE?

                       The IRS tax audits to reduce the “tax gap.” An IRS audit is random, but the IRS regularly selects taxpayers based on doubtful activities. So, here are seven of the biggest red flags, they are: 

  • Making math error
  • Failing to report some income
  • Claiming too many charitable donations
  • Reporting too many dropping on a Schedule C
  • Deducting too many business expenses
  • Claiming a home office deduction
  • Using nice, neat, round numbers.

WHAT ARE THE TYPES OF AUDITS?

                       There are three types of tax audit they are mail audit, office audit, and field audit. Mail audit is the simple tax audit that the tax employees notified and requested the taxpayer to give additional documents on the specified tax return declaration and deductions. An Office audit is the extra procedure to the mail audit, where this kind of audit needs you to visit the local tax department. A Field audit is a deep audit from tax departments where the tax officer inspects your documents and questioning you in-office. Other than this, there are few more audits; they are desk audits, limited audits, and comprehensive audits.

HOW TO IDENTIFY AN IRS AUDIT LETTER?

                       An IRS audit letter will come to you by certified mail; while opening it will identify your name, taxpayer, form number, employee ID number, and contact details. The first line of the IRS letter may state something like “your income tax return for the year show and show has been selected for examination.” It is more important to respond to the IRS as soon as possible, through a phone call or a response to the audit letter within 30 days. Any late responses will be penalized.  

IS THERE ANY NECESSARY TO HIRE A PROFESSIONAL?

                       While the experts say it is your choice to hire a professional, but many say it can be worth the pay. “It is really important to get an experienced representative in any situation” – Lance Christensen. If you have decided to hire a professional, consider an expert such as an enrolled agent, certified public accountant, or lawyer who specializes in audit representation. 

WHAT RAISES A RED FLAG?

                       No one is thrilled about being audited by the IRS. Even though the IRS has been banged like everyone else, there is still a possibility your return will be flagged for an audit. 

The IRS audited only 0.4% of all individual returns in 2019, so your possibility is already pretty slim. Those who were audited never seen IRS as a person; rather, everything was done by mail. 

But there are a few red flags it will stop to look at that could raise your odds of getting that feared audit stamp on your return. 

WEAKNESS IN REPORTING ALL TAXABLE INCOME:

                       Clients, employers, banks, and other institutions are needed to send the IRS the same details they send you on your W2s, 1099s, and other IRS forms. If the money is made, the IRS, in all probability, knows about it.

When you don’t report everything, the powers could match up with the reports they have. Then they suspect something; the IRS starts digging everything. 

TAKING HIGH ABSTRACTION OR CREDITS:

                       It is easy to go fierce on those educations and credits the IRS provides. Don’t take yourself into trusting all of them, which apply to you. If it extends, don’t do it. A proficient accountant can guide you through those that are potentially ok for you to claim, but if it is uncertain, don’t take it. 

LARGE HUMANITARIAN CONTRIBUTIONS:

                       Are you giving clothes to charity? Don’t try to get the market value back. Think more depot sale put a price on.

Have you given to your church, donated to a cancer fund, or let an organization have a car? All are worthy activities. But don’t overdo the amount you gave to a humanitarian organization. 

The IRS has decided to compare your income with your charitable giving. From your tax bracket, the IRS knows the average charitable contributions for people. You may get mail from them when they see giving more than you can afford. 

AFFIRMING BUSINESS MISLAYING OR CHARGE: 

                       If you are an individualistic outworker or own a business, be careful what you assert as a tax withdrawal. Some of them can get your return flagged:

  • Claiming 100% business use of a vehicle
  • Withdrawing too many business expenses
  • Affirming too many losses on your schedule
  • Scripting off hobby expenses a business expenses

Unless you prove that your new car was used only for business, reconsider your plan to write it off as a business expense. Read the rules for business expenses so you know when and how to repay losses on capital spending.

UTILIZING A MARIJUANA BUSINESS:

                       Have you heard about this? Yes, this is THE new one. The growth of legal marijuana sales in the United States gave way to a multiplication of new businesses. They are prohibited from claiming business write-offs, which may come as an unpleasant shock to newly minted entrepreneurs. 

The only payment these businesses can legally claim is the cost of the product. Why is it happening so? Because a federal statute says you can’t claim tax withdraws if you sell a managed substance that is illegal under federal law. 

According to Uncle Sam, Marijuana is still illegal, no matter what your style says about it. 

APPEALING IN CRYPTOCURRENCY TRADING:                                                                   

                       Cryptocurrency is a tricky deal with, tax-wise, which is not treated as cash. As a substitute, the IRS looks at trading cryptocurrency like buying and selling property. Different rules are applied. Using the virtual currency, you need to compute gain or loss, which means you need records of how much you spent acquiring bitcoin, etc. The value of the item you bought, the value of the bitcoin when you sell it, and so on.

The IRS is looking for cryptocurrency usage. Kiplinger magazine says, “The IRS is on the chase for taxpayers who sell, receive, trade, or else a deal in bitcoin or further virtual currency and is using…… everything in it is a weapon. 

Talk to your CPA or tax counsel before striving this. 

USAGE OF MORE CASH FOR TRANSACTIONS:

                       Do you run a cash business or get paid first and foremost in cash for everything you give? The IRS announces and begins to admire if any of it is getting to you under the table. 

Woefully, too many people have used cash to avoid rewarding taxes. It is made that they look very closely at cash transactions. 

MATH FAULTS AND PERFECTLY ROUND NUMBERS:

                       If math has always been your collapse, maybe you have someone do your taxes for you. They do not give you much of the well-being of the doubt when you make an error.  

Frequently, you receive a mailed announces showing the errors on your way and tempting you to send a rectified return. However, they have sent you a mail, which indicates that the IRS has pulled your return for a closer look. 

Unless specifically instructed by IRS, don’t try to make things easier on yourself by rounding the numbers to the nearest dollars. Every number on the 1040 form and your document must match. And if they find out the difference, they will report things in $100 increments.

They will let you if your round is to the nearest dollar; just be sure your round is in the correct direction. Always double-check all of your math before signing your return.

FOREIGN INVESTMENT:

                       If you assert the foreign earned income barring or you did not report a foreign bank account, the IRS has the system kick out your return for further scrutiny. The Foreign Account Tax Compliance Act has strict reporting requirements for foreign accounts. 

In bygone days, you did not have to report these accounts; you checked a box and went on your blithe way. Now do check your box and identify the institution and report the overpriced dollar amount in your account final year. 

The way of applying the law seems like you cannot win. If you abide by it, you increase your chance of an audit. If you don’t abide by it, you increase your chance of an audit, and you get hit with sturdy punishment. 

HOW LONG DOES THE IRS AUDIT TAKE?

                       The auditing period varies depending upon the type of audit, the complexity of the issues, the availability of both parties for scheduling meetings; and your agreement or disagreement with the findings. You find good news here, that is, there’s a time limit called the statute of limitations. This time limit is how long the IRS assesses, additional taxes on the return that’s being audited. It expires three years from the due date of the return or the date you filed it. For example: if a person is filing on April 15, 2015, the statute would expire on April 15, 2018. 

WHAT HAPPENS WHEN YOU DO NOT RESPOND TO AN IRS AUDIT?

Ignoring or not responding to an IRS audit can result in an assessment of additional tax, penalties, and interest. If you are ignoring the subsequent notices from the IRS, you may lose your right to dispute the case in Tax Court, and the IRS can begin trying to collect the tax. 

HOW DOES THE IRS AUDIT CONCLUDE?

                      It can be concluded in three ways: no change agreed and disagreed. No change- an audit in which you have reported all of the items being reviewed and results in no changes. Agreed- where the IRS puts forward the changes, you understand and agree with the changes happening. Disagreed- where the IRS has proposed changes, and you understand but disagree with what the changes happening. 

CONCLUSION: These are few red flags that source the IRS to screw your return for audit. That does not mean you should not take all legal withdrawal and credits. If you have a doubt, call a reputable tax expert like Top Tax Defenders to decrease your chances of a tax audit.