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Ways to avoid tax audits

It’s worth repeating that many things can trigger an IRS audit. Obviously, inaccuracies on forms, claims for deductions which you do not qualify, or the failure to report certain income will result in problems. But it would be difficult to list every type of behavior that could result in an audit.

If you receive a notification from the IRS, please never ignore it. Such notices often specify a certain time for which to reply. Failure to reply can only lead to additional problems including penalties.

What triggers tax audits?

Some major reasons for tax audits include:

  • Reporting significantly less income than received in prior returns: The IRS keeps close tabs on income earned every year, and it’s common for them to look back at your past filings and compare them with current ones.
  • Missing tax forms: Whether you are a contractor or full-time employee, your employer will forward to the IRS W-2 information and copies of 1099 forms. Not including such forms in your individual returns alerts the IRS to a potential problem.
  • Self-employment status: For a variety of reasons, the IRS pays closer attention to returns of individuals who are self-employed. For that reason, it’s especially important for such individuals to be accurate in all filings with the IRS.
  • Claiming hobby expenses as business expenses: The IRS prohibits writing off expenses for hobbies. Therefore, take care when declaring expenses that have no legitimate tie with your business.
  • Claiming home office expenses without documenting the business relation: When taking deductions for use of a home office, use of the office need to be entirely for business. Deductions are not allowable for only periodically conducting business in the home office.
  • Excessive entertainment and meals expenses: Do not deduct such items without there being a legitimate business connection. The IRS will closely check on these sorts of deductions.
  • Failure to report on overseas accounts and assets: We’ve stated many times on this blog the importance of accuracy in reporting on overseas assets. The penalties for inaccurate or incomplete reporting are severe.

While nobody wants to face a tax audit, a simple notification of an audit does not imply you are guilty of wrongdoing. However, the consequences are severe enough that you may wish to speak with experienced legal counsel regarding your options.

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