Saturday, September 15, 2012, AM | Leave Comment
The Internal Revenue Service or IRS, a US government agency, has been ramping up the process of audits in order to plug the holes between tax payers and the government. The expected gross tax gap before the collection efforts in the year 2005 had been around $345 billion approximately.
However, the shrinking of tax gaps isn’t being done by IRS through random audits. Audits are specifically done on the basis of specific items or patterns of your tax return behaviour.
As no one particularly likes to receive IRS Notice on additional tax due or to come to the IRS office for an audit, it is important that you know what can trigger such actions and take necessary steps to avoid them.
Here is a list of situations that can trigger IRS audits:
Did you include your form 1099 or any other additional income?
According to the IRS report, more than 60% of non reported and under reported individual income tax is related to either business or self-employed income. That is why it is important that you ensure compliance with all individual income.
As a rule, IRS matches form 1099 that has been kept in their record with the amounts on your return, in order to make sure that everything has parity. You should therefore try to list all your additional sources of income in form 1099 in order to avoid any further hitches with the IRS. Claiming deduction larger in relation to your income can often lead you into trouble.
Do not forget to include your home office deductions:
If you are using your own home for business purposes, the related costs should be deducted as part of home office deduction. However, according to the IRS guidelines, in order to apply for this you must use part of your home attributable to business. This is to be done exclusively and almost regularly.
Your home office must be your actual office, and not simply a place where you conduct some of your day-to-day work.
Defrauding the IRS: Claiming charitable deductions that are disproportionately high:
More than 90% of taxpayers opt to itemise their claim for charitable deductions. It is in fact one of the most common deductions claimed by a person while filing his or her tax deduction.
In various cases, there are in fact people, who regularly donate large amounts to various organisations. In such cases, you should have authorised documents to substantiate your statement. It would be ideal to make non-cash donations, if possible.
Avoid citing too many losses in Schedule C:
There is always a temptation amongst people to overstate their losses and that is why taxpayers filing for Schedule C are more prone to face audit.
Don’t be a maths pro – refrain from using round numbers:
The tax return that is expected of you is to be at par with what you earn. That is why it is important that you avoid round-up figures in order to avoid audits.
Triggering of tax audits can thus be done with the help of these few steps. After all it’s easier to be safe than being sorry.
This guest post is contributed by Lauren Devaney. She is a financial consultant who works with payday loans uk to help people overcome their financial problems.