It’s not out of the ordinary to receive a notice that you’re going to be audited and you have absolutely no clue what you’ve done wrong. The Tax Code is hard to fathom, so thoughts of unwilling fraud accumulate in your mind automatically.
An IRS audit is an examination done by a professional auditor when the IRS targeted your company because they’ve spotted inconsistencies in your tax returns or when you’ve failed to file those returns for a long period.
Most employers are baffled when they get notified of the upcoming audit, but what exactly triggers the IRS to mobilize and rummage through your business? There are, in fact, numerous “red flags,” so to speak. Let’s see what they are.
1. Making Too Much Money
One of the reasons you got into business was undoubtedly that of making money. However, when your income is constantly surging upwards from year to year, the IRS suddenly becomes suspicious, and you’re more prone to being audited.
In this case, the audit will examine your income and the ways you’re obtaining it. When large sums of money are involved, the IRS thinks of money laundering. Sure, if you’re an honest, top-notch businessman and you’ve acquired your fortune through clean means, you have no reason to worry about the audit.
2. Failing to Report All of Your Income
It’s extremely easy to overlook reporting your income, in particular when it comes from more than one source. You must declare all of your money to the IRS, lest they audit you when you least expect it. Not reporting it can be an honest mistake, but you’ll still be at least fined. It’s your duty to report everything to them.
3. Overlooking the Foreign Account Tax Compliance Act (FATCA)
In the past, you didn’t have to report to the IRS how much money you had in a foreign account. Now you do.
This is one of the most common reasons for an IRS audit. They think that you’re trying to hide something from them when you’re not reporting the account you have overseas, the bank where you have that certain account and the amount of money you have in it. So, they have to make sure that you’re not a tax evader or/and seeker of amnesty. The IRS are constantly monitoring people that might have such accounts.
4. Getting Money Out of Your 401(K) or Your IRA
An IRS audit can befall you if you take money out of these two types of accounts until you’ve hit the retirement age. As the 401(k) and the IRA reduce your taxable income (which means you’ll pay less in taxes), taking money from these accounts is a red flag concerning your income tax returns.
Apart from the audit, you’ll also get a 10% penalty. There are strict rules that apply to the withdrawal of money before the retirement age. You must respect them if you don’t want to be subjected to an audit you could’ve easily avoided.
5. Too Many Business Expenses
The IRS keeps its eyes open for business expenses that fringe personal ones. Such a situation will certainly get an auditor questioning you on the issue. High deductions on traveling, meals, the use of the car expressly for business and entertainment are red flags that inform the IRS that something is not all right.
Those deductions must be sustained with the proper documentation. If it’s not, you better prepare yourself for the incoming IRS audit.
6. Giving Too Much Money to Charity
You wouldn’t think that you can get audited by the IRS for being a charitable person, but you can. In fact, it’s one of the most common audit triggers.
When you give too much to charity, the IRS will compare your income with that of other people that have a similar income to yours. If you exceed the value of the donation that the IRS would expect for that level of revenue, you’ll undoubtedly be more than eligible to be audited. In this case, the inspection is usually thorough and long-lasting.
7. You Are a Small Business Owner
It’s always the small firms that try to evade paying too many taxes and getting more profit by not reporting all of their income. That is the reason why small businesses are audited more than big ones.
The IRS is always very skeptical on the reported income of these firms because the owners almost never learn that they must report every shred of revenue and they try to get away with as much profit as possible. This is not even much of an audit trigger, but more of a certainty that the audit is, most of the times, justified.
So, these are the main IRS audit warning signs that you should be aware of. You should try to avoid them as much as possible if you don’t want the inspectors visiting you anytime soon.