Recognizing Four Red Flags That May Lead to a Tax Audit

Apr 14, 2023 | Blog

Any tax attorney in San Jose would likely agree that anxiety regarding Internal Revenue Service audits is becoming very common in 2023. The source of these heightened concerns is likely the $80 billion in funding deployed to the IRS for enforcement activities, as well as for the hiring of more workers. In most cases, maintaining proper documentation is all you have to do to avoid the dreaded audit. Additionally, there are measures virtually any taxpayer can take to stay off the IRS’s radar, including the following:

  1. Round Numbers Should Be Avoided

Many tax lawyers in San Jose believe that some red flags are more likely than others to lead to an audit by the IRS, such as round numbers. Financial planners and certified public accountants state that estimating instead of listing precise amounts on the tax return can trigger auditing. This is because the odds of a donation, expense, or other amount coming out to a neat, round figure is unlikely.  For instance, a business owner listing $3,000 for IT support, $4,000 for legal advice, $20,000 for marketing, and $15,000 for insurance will likely be flagged because agents will realize the person is simply estimating.

2. Tax Breaks Disproportionate with Income

Another scenario in which taxpayers may find themselves in need of an IRS tax attorney is if they try to claim deductions or credits that appear unreasonable when compared to yearly income. Making charitable deductions far too high almost always triggers an audit, such as writing off $65,000 for charity in the same year the filer only claimed $110,000 in income.2. Discrepancies with Earned Income Tax Credit (“EITC”)

Uncle Sam also typically scrutinizes refundable credits which sometimes result in refunds, despite the credit value exceeding the amount of owed taxes. Although there has been a decline in audits overall, they haven’t decreased as much for filers claiming the EITC. In fact, according to the Treasury Inspector General for Tax Administration, audits have not dropped very much for middle-income or low- income workers who regularly claim this credit.

3. Unclaimed Income

According to a California tax-audit attorney, another issue that frequently triggers an IRS audit is unclaimed income. This seems like an easy one, but it leads to a high number of audits each year in the United States. The amount of income claimed on the person’s tax return is compared to income reported by financial institutions and employers. When there is a discrepancy, trouble can follow. Some of the most common examples of income that many filers “forget” to claim include money acquired from investment earnings or contract work. However, forms 1099-B and 1099-NEC are used by financial institutions and companies, and they must report what was paid out, which leads to scrutiny when the sums don’t match.

4. Keep Tax Records – The Importance of Documentation

Most people panic at the thought of a tax audit, and many are somewhat scared of the IRS in general, which usually comes from a lack of understanding about how the system works. Although filing may be considered complicated from a certain perspective, minimizing audit chances should not be difficult if proper documentation is provided.

The best way for filers to protect themselves is by keeping appropriate records, saving receipts, staying organized, and, above all, documenting everything. According to the IRS itself, it is always wise to keep tax records for up to seven years just to be on the safe side. Murky records, missing receipts, or other ambiguous paperwork may lead to an audit that could have otherwise been avoided. Ultimately, a tax attorney in San Jose is the best person to turn to for advice about filing taxes.