If you had a fantastic year last year where profits went through the roof, congratulations! Unfortunately your good fortune and hard work could also make you a target for an IRS audit. Any changes in your circumstances, however seemingly innocuous, can trigger an audit. But the good news is that there are ways to sail through the IRS’s stringent checks or just avoid an audit altogether. Can you recognize the tax audit red flags?
If you use your home as your office then it is only fair that you can claim a deduction for household expenses that are linked to running your business. This could include anything from utility bills to homeowners’ association costs. You’ll need to keep documentation of these business expenses and work out accurately how much square footage and energy is separate from normal household expenses.
This is one for the salespeople and mobile businesses. You may feel that you use your vehicle 100% of the time for work. However, the IRS will need to see conclusive proof of this if you want to claim the cost of running and maintaining your vehicle as a business expense. Are you really using your vehicle 100% of the time for work purposes? If that is the case are you walking everywhere when you need to complete personal errands? Be careful what you claim for here, and ensure you can demonstrate an alternative means of transport for personal use.
This is a huge red flag to the IRS. With the myriad of electronic payment methods available today, a business that only takes cash payments is becoming less common and more suspicious. Even street stalls and mobile beauticians are signing up to third party electronic payment services. If you do run a cash-only business it is important that you bank all money received and keep documented evidence such as receipts and bank statements up to date.
The IRS uses lots of data to determine how much others earning similar income to you are giving to charity. If they think you are claiming too much in charity deductions they may trigger the audit process. Again, documentation will be your friend here. You will need to have hard evidence of both monetary and non-monetary donations that states the amount donated and who the donation was given to.
If you are using digital currencies, such as virtual or crypto currencies, and earning above £200,000, you currently have a 1 in 37 chance of being audited by the IRS. Payments in these currencies can be harder to keep track of, and so a solid audit trail of every transaction you make will be required to satisfy the IRS’s curiosity.
Being a landlord can be tough sometimes, but it can be very lucrative if you put in the time and effort. A lot of that effort involves finding the right tenant and encouraging long tenancies that lead to long-term wealth. The IRS may start getting suspicious if you are making regular claims for property rental losses, and they may ask for documented proof that you are doing all you can to find tenants.
The IRS use many different data sources to determine who to audit next. A small change in your circumstances or a minor difference between this year’s tax return and last year’s could be all it takes to hit their radar. By keeping accurate and up-to-date records you will have a better chance of appeasing them and even avoiding an IRS audit in the first place.
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