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Top Reasons for Income Tax Audit
You should understand the top reasons for income tax audit so that you can avoid one yourself. The first and foremost reason for income tax audit is filing inaccurate returns. This usually happens when income tax returns have not prepared by a certified tax professional who knows your situation. This makes perfect sense even if you feel you are capable of doing it yourself. We tend to make mistakes while preparing our own income tax returns– and while a few mathematical errors are usually not serious, several mistakes can draw unwanted attention of the IRS.
How you earn your living can also figure in the top reasons for income tax audit. You should be aware that certain professions attract more income tax scrutiny than others. Self-employed people, or those who receive large amounts of cash are always at a greater risk of an audit than those who receive a steady salary. The IRS has recognized that most under-reporting of income occurs among the self-employed. In other words, they are always watchful for red flags. These red flags can include taking home office deductions. You should therefore weigh the risks carefully before deciding to be inaccurate. A qualified tax professional is best qualified to advise you on this.
Another of the top reasons for income tax audit is not reporting taxable alimony payments received. It is a standard practice with the IRS to match deductions for alimony from one spouse with the alimony income reported by the other. Yet another of the top reasons for income tax audit is inaccurate automobile logs for self-employed persons or employed individuals using their cars for business purposes. Those who do not keep detailed records of their mileage on a daily basis can land in trouble. It is always advisable to keep a log that charts the beginning and ending odometer readings, location and even the reason for the trip. There are limitations on how much of those miles qualify for business use.
Large amounts of itemized deductions also number among the top reasons for income tax audit. Most of us claim every deduction we are entitled to by law. However, when one makes tax deductions that exceed the averages for one’s income, one invites income tax audit. This particularly includes people that make large charitable donations in relation to their incomes. It is important to keep track of the date of the donation, the receiving organization and the amount of the contribution in order to be safe. Such payments should be made by check whenever possible, so as to create a record. One should also obtain a receipt from the charity for donations exceeding $250. In case of an income tax audit, one should be prepared to offer the IRS the original value of the items donated (non-monetary) and their fair market value as well.
Filing returns with very high Discriminate Information Function (DIF) scores is also among the top reasons for income tax audit. This is because such scores pose the best chance for the IRS to collect additional taxes, interest and penalties. One can avoid a high DIF by ensuring that one reports all taxable income, including interest earned on bank accounts and interest earned on investments.
Offshore credit cards are also one of the top reasons for income tax audit because the IRS is very interested in individuals that put money in an offshore account to avoid paying taxes on the interest.
Carelessness while selling stocks or bonds is another of the top reasons for income tax audit. One should always claim capital gains in full and back out one’s purchase price on another section of the income tax returns. For instance, it is definitely not advisable to buy stock for $2,000, sell it for $5,000 and then claim only $3,000 in capital gains. This can alert the IRS, and it is far wiser to claim the full $5,000 and back out the $2,000 purchase price on one’s return.