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Nine Possible Red Flags That Could Prompt a Tax Audit

Taxpayers’ accounts and financial information could be inspected by the IRS to ensure that all applicable tax regulations are being obeyed. Taxpayers are still afraid of receiving an IRS letter, even though the IRS only audited 0.3 percent of individual income tax returns for 2020. Fear of an IRS audit may keep some taxpayers from claiming all of the tax savings they are entitled to, according to the report.

Some frequent red flags that can lead to an IRS audit and what you can do about it are outlined in this article:-

  • Not all of your earnings were reported to the IRS.

It is highly possible that you will be audited if you have not disclosed your income on the various forms, such as 1099s or W-2s.
Especially if you worked as a freelancer for multiple companies or changed jobs in the middle of the year, double-check your tax documents to make sure you don’t have any missing W-2s or 1099s.

  • You claimed a deduction for your home office.

Many people are scared to claim the home office deduction because they fear an audit would follow. A part of your mortgage interest, homeowner’s or renters insurance, and utility costs can be deducted based on the amount of space in your home that you use for your business. Do not forget to keep track of all of your expenditures.
You may be able to claim a partial-year home office deduction if you worked as a freelancer or self-employed for a few months.

  • You stated that your company had suffered losses.

When you run a business, you can avoid a lot of expenses, but the IRS wants to make sure you didn’t set up a shady operation solely to take advantage of the tax breaks.
The IRS considers your business to be a business if it has made a profit in three of the last five years. In order to verify that it’s a legitimate business, you’ll need to take additional actions.

  • Expenses for your company were out of the ordinary.

It is possible that the IRS will get in touch with you if your business expenses are much higher than those of other businesses in your industry.
Record all your business expenses for at least three years after the tax-filing deadline, or six years for those who receive revenue from multiple sources. This is especially important for the years when you experience big expenses. Separate your business costs from your personal ones.

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  • There were some stock trades that you didn’t report.

A copy of Form 1099-B is sent by the brokerage business to you and the Internal Revenue Service, and you must include Schedule D on your tax return in order to record capital gains and losses.
An audit could occur if you fail to report information from the 1099-B or if you have a significant change in your capital gains income.

  • Your cryptocurrency transactions were not reported.

Any cryptocurrency transactions should be reported to the IRS. On the 1040 form, this question appears towards the top: Do you own, trade, or otherwise dispose of any virtual currency at any point in the year 2021?
In order to keep track of one’s cryptocurrency transactions and protect oneself from hackers, one should use a crypto wallet or crypto tracker.

  • You donated a lot of money to the community.

By filing your tax return, you need to have all of the evidence you’ll need if you’re audited, not just a letter from the charity. Non-cash donations, such as clothing, household products, or automobiles, necessitate additional record-keeping obligations.

  • You made lots of money.

The more money you make, the more probable it is that you will be audited by the government.
At higher income levels, it pays to be extra attentive when reporting your income and substantiating your deductions. An enrolled agent or a certified public accountant (CPA) can help you keep track of all the rules and regulations, assist if you are audited, and help you plan for the future so that your taxes can be minimised.

  • You committed mistakes.

Tax returns with basic flaws like erroneous Social Security numbers and math errors are also audited by the Internal Revenue Service. Your spending may be scrutinised further if you round the figures instead of using the exact cash amounts.