5 Reasons You Might Get Audited This Year, According to Finance Experts
THERE ARE SEVERAL RISK FACTORS THAT COULD LEAD TO A RUN-IN WITH THE IRS.
Perhaps the only thing worse than compiling your taxes each year is finding out you're getting audited after all of your hard work. Fortunately, there are plenty of services and software options that can help you avoid any potential headaches or costly fines—even if you're under a time crunch. But if you're looking for a better idea of how to steer clear of a run-in with the IRS, there are a few things to remember before you file. Read on for the reasons you might get audited this year, according to finance experts.
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You've misreported your income.
Preparing to file your taxes can be relatively straightforward if you're dealing with a single paycheck. But if you have a complicated financial situation with multiple streams of income, you could land yourself in hot water if you're not careful while filling out forms.
"The IRS uses a program to match up what was reported to the IRS from employers, banks, brokerage, and other sources compared to what you reported on your tax return. If there is a difference, it could open you up to an audit," says Robert Farrington, founder and CEO of The College Investor.
"So, make sure that you're accurately entering all your information from those W2s, 1099s, and other forms to avoid an audit. If there is an error on any of them, you need to work with whoever issued it to get it resolved," he says.
Your income changes from year to year.
Whether it's a change in employment or an unforeseen financial emergency, everyone has good and bad years with income. However, besides the stress of uncertainty, significant changes in money can also bring about more scrutiny from officials.
"If your income rises and falls each and every year, the IRS might want to know more about why it does that," Riley Adams, founder and CEO of WealthUp.com, tells Best Life. "It might be because you're claiming different credits and deductions each year, your income isn't consistent, or perhaps something else."
But this doesn't necessarily mean you need to pigeonhole your earnings. "You're not being penalized for having dynamic income, but compared to tax returns with steady taxable income year to year, it certainly makes your return stand out," says Adams. "If it's just part of your normal earnings and nothing out of the ordinary, you shouldn't sweat it: Life has its ups and downs, and so does your income."
"As always, just make sure you document everything, provide substantiated tax positions on your return, and possibly check with a professional if you've got any questions," he suggests.
READ THIS NEXT: 4 Warnings About Using TurboTax, According to Experts.
You're filing incorrectly for your business.
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Entrepreneurs know that businesses can come in all shapes and sizes. This can often warrant bringing in an outside professional to ensure everything is handled correctly before filing for tax purposes. Otherwise, it could wind up becoming grounds for further investigation.
"If you have a side gig or business, there are a lot of things that could trigger an audit," Farrington warns. "For example, excessive deductions or depreciation that don't make sense for your business. Or unusual losses that could indicate the business is a hobby and not a business."
He adds, "You must realize that the IRS has millions of business returns, data points, and more to see if your business is 'normal' or not. So if you're claiming items on your tax return, you need to be able to prove the expense was ordinary and necessary for the course of doing business."
And there's another essential piece of filing information to keep in mind.
"Round numbers are a red flag," says Moira Corcoran, a certified public accountant and tax expert at JustAnswer. "If you write off an even $8,000 for marketing, $5,000 for legal, or $3,000 for travel, the IRS knows you are not adding legitimate deductions."
You're making a lot of money.
In the grand scheme of things, making too much money is not something people would be likely to complain about. But according to experts, your increased earning could put you at higher risk of a potential audit.
"If you're pulling in a big income and think paying your fair share of taxes will be enough to keep the IRS off your back, you could be in for a surprise," says Adams. "You may very well be right, but if you try to get cute and claim some high-income-focused tax credits and deductions but do it improperly, you can expect the IRS to knock at your door—although not literally, as they generally send you something in the mail first."
"The IRS has more to gain by scrutinizing a high-income taxpayer than it would for someone who earns less. So, they'll be more likely to check that you've dotted your i's and crossed your t's," Adams explains.
"Make sure you check —and then double-check—what you're claiming on your return before filing it. You'll want to know you're not improperly applying some tax positions that you think will lower your taxable income but end up causing more headaches than anticipated," he suggests.
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It could be no fault of your own.
No matter your situation, there may come a point where the confusing process of preparing and filing your taxes catches you off-guard. But even if you've managed to get everything right, you could still wind up getting contacted by the authorities.
"Remember that an audit doesn't necessarily mean you did anything wrong," says Farrington. "The IRS is doing an 'audit,' which means checking up on everything you reported."
And it doesn't always end up in penalties. "I've seen some cases of audits go in the taxpayer's favor, meaning the IRS actually owed a bigger refund after everything was checked," he says. "That's why the important part is to keep accurate records and documents."
Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you're spending, saving, or investing, always consult your financial advisor directly.