Six Triggers of an IRS Audit

An audit is, in itself, not a bad thing.  we have come to equate audit with accusation or wrongdoing but an IRS audit is simply a review of the records.  Int his spirit, there is no reason to fear IRS audit.

In reality, the IRS audit process is triggered by assumption of wrongdoing and, without excellent records or an adept tax attorney paired with a skilled CPA, individuals and business owners have plenty to fear from an IRS audit.

Why IRS starts an audit

Most often, audits are begun because of suspicious activity.  Sometimes, mistakes are honest ones and sometimes IRS audits and discovers mistakes that they themselves didn’t see on first look.

Here are some of the reasons IRS can trigger an audit:

1. Honest mistakes

You’ll be fined regardless of  your intent, so ensure a competent CPA prepares your taxes.

2. Under reporting income

Businesses file their 1099s religiously.  It is in a business’ best interest to report payments to contractors, they get a deduction for so doing.  Contractors occasionally “forget” to report 1099 wages.  IRS knows the money was paid and they can easily track that no taxes were paid on that money.  Want to trigger an audit? Try hiding 1099 wages.

3. 501c write offs

Usually (and IRS bases most of its red flags on a mean) lower middle and middle class people do not donate large parts of their income to charity.  You may tithe, you may be the exception.  But, IRS is nota. fan of exceptions and large charitable donations with small incomes will trigger a second look.

4. Extraordinary business expenses

There are industry standards for business deductions.  If you write of a large format printer and you are in PR or marketing, IRS will likely see that as a legitimate expense.  That vacation to Costa Rica?  Less likely. Be conservative in writing off personal expenses as business expenses.

6. The home office

If you run your business out the converted horse barn and employees come to work in that space, your office is likely legitimate. If you claim 1/5th of your rent because you work in the kitchen, you may find IRS has something to say about it. The home office expense gets scrutinized.  If you take it, be prepared to defend it.