What Triggers an IRS Audit? | RefundNote Blog

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What Triggers an IRS Audit?

What Triggers an IRS Audit?

No one wants to go through a stressful IRS audit. In fact, studies have shown that when people sit down to file their taxes, it can raise their blood pressure. Why? Because of the fear of missing something or triggering an IRS audit. In most cases, it’s hard to come by. On average, the IRS audits about 0.8% of tax returns only. The chances of being audited are thus minimal. However, the risk is still there. Here are several IRS audit triggers that you should avoid.

1.    Your income is too little or too much

Withholding your income can trigger the IRS to audit you. If you claim deductions that reduce your income significantly, you will raise the IRS tax audit flags. Individuals whose incomes don’t match their lifestyle, and trust me, the IRS has ways of knowing about this, are an easy target for the audit. If you earn too much, especially above $200,000, then if the IRS believes there’s a chance to recover taxes from you, you will be put in the spotlight.

2.    Major changes in income

The IRS algorithms are set such that if there’s a drastic change in your income, the IRS tax audit flags will be raised. The algorithms check your income history and expenditure and if there’s a drastic change, then the algorithms can raise an alarm.

3.    You’re self-employed

If you’re self-employed, then you can be an easy target for IRS audits. This is because self-employed people are more likely to report wrong figures. That notwithstanding, self-employed people are at a high risk of overlooking some incomes as they may receive some payments in cash. Every income earned is subject to tax.

4.    Claiming a lot of deductions

When you start claiming too many deductions, for example, claiming that you gave huge amounts of donations when you didn’t, your chances of being audited become manifold. This is known as itemizing. The IRS expects that you live within your means. You can’t claim to give donations of $30,000 when your income is $40,000.

5.    Dealing with cash only transactions

Dealing with a cash business puts you on the spot too. You’re not receiving 1099s for your services, and you’re also most likely to overlook incomes. In other instances, when your lifestyle surpasses your means, IRS tax audit flags can get raised.

6.    You have foreign accounts

The IRS has become strict recently with regards to offshore accounts. They can solicit your bank information from the foreign bank to ensure that your account balances match with what you file. So having a foreign bank account does not hide you from the long arm of the government.

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