You are convinced that your chances of getting a tax audit is close to zero and although only around 0.7% of tax returns do get an audit from the Internal Revenue Service, it is still worth knowing what red flags will elicit an audit to keep your business and your finances safe.
However, before you go ahead with a risky deduction, keep this in mind: The figure you have now will likely jolt to up to 9.5 % if you earn more than a million dollars a year.
Simply put, the more money you are making your business, the more likely will you get the chance to be audited. This is according to Dave Du Val, a chief consumer advocacy officer at the TaxAudit.com. This is an audit defense company that manages over twenty five thousand audits every year.
It does not matter when you are earning big figures or if you belong to a lower tax brackets, regardless, identifying these red flags and avoiding them will lower your chances of attracting the attention of the Internal Revenue Service.
- Report Your Income And Don’t Leave A Single One Out
Ideally, this is what you should do but many business owners are tempted to make omissions in the hopes that they won’t be charged with a much higher tax. However, this move can backfire on you because if you leave any income off, the chances of a taxman knocking on your doors will be high.
According to Mike Campbell, a CPA and also a tax partner at BDO USA said that the Internal Revenue Service would surely chase after taxpayers when the agency shows that a document such as a W-2 or a 1099 matches the income with a Social Security number and you’ve kept it a secret. This also includes any 1099-K or 1099-MISC even if it’s just a sideline such as using your car and driving it for Uber or if you are renting out a space in your home and advertising in on Airbnb.
This also applies if you have properties and assets abroad. If you have such properties you will be asked to fill out a yearly report of foreign bank and financial accounts and also you will be asked to fill out Form 8938 to the Internal Revenue Service and the Treasury Department but again, this only applies if you own assets overseas.
- List Down Big Deductions And Detail Them
Do know that the auditors who work for the Internal Revenue Service rely on outliers. The reason for this is simple; they do not have the manpower to do it. Just so you know, the number of staff working for the Internal Revenue Service, the ones who impose tax laws have dropped to 23%. What used to be fifty thousand staff members back in 2010 have now plummeted to 39,000 in the previous year.
You have to know that the Internal Revenue Service is keen on observing deductions that do not make any sense. Once they see that something is fishy, they’ll probably audit you. Dramatic losses on rentals and other things will raise suspicions and before you know, a taxman is waiting for you in your front door.
To save yourself from all these audits, it is best that you get bookkeeping services. Bookkeepers can help you organize and deal with your finances, saving you from unnecessary audits.