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4 Red Flags that Can Attract an IRS Audit

Unfortunately, the tax season does not end on April 15 every year. Yes, that is the time by when you should file your taxes but an audit letter can come from the IRS 3-6 years post your filing date saying that the Federal institution needs to revisit your finances. Unless your tax return is straightforward, you should file your taxes this season with one eye on an audit. Almost anything on your file can stand out as a red flag and attract the scrutinizing attention of the IRS.

To help you understand audits better, here are 4 common red flags that almost always trigger an IRS audit. Make sure you stay away from these by taking the appropriate steps.

1. You had a massive jump in income this year

Statistically, the IRS audits just 0.3% of taxpayers every year with an annual income of $200,000. That rate rises to 1% for taxpayers who earn between $200,000 and $1 million. Over $1 million, the IRS audits nearly 2.4% of taxpayers. So, even if you did not earn more than $1 million this tax year, make sure you have a valid reason for your sudden jump in income. Maybe you switched jobs or started a side hustle that improved your income. Report the same in IRS Forms and you might not get audited at all.

2. There is a mismatch in your reported income

Many taxpayers make this honest mistake, especially when they switch jobs. Your current employer sends a copy of your W2 to both the IRS and you. If you, mistakenly, report your previous income according to your previous W2, the IRS will notice the mismatch immediately. The same thing happens when you fail to report your investment gains. Your broker sends a copy to the IRS and the income mismatch stands out as a bright red flag. Keep all your income documents in one place and take care in reporting every penny that you earned.

3. Your business has never earned a profit

The IRS looks at such self-employed taxpayers suspiciously. If you have claimed to own a business for 5 straight years, reported massive expenses, and did not show a single dollar as profit, the IRS assumes that you are looking to evade taxes. Now, during the initial years, any business leaks money. You are bound to make little to no profit with massive expenses. Just keep records of all your expenses and show the IRS that you are indeed running at a loss. You can then avoid an audit and claim adequate business-related deductions.

4. You paid a massive sum for charity without any documentation

Not that the IRS is opposed to good-hearted philanthropy but it gets suspicious if you go on handing out massive sums in charity every tax year. Charitable donations attract substantial tax breaks. For the tax year 2021, especially, taxpayers are eligible to claim a further deduction of $300 on top of the standard deduction. Obviously, the IRS is on its guards when it comes to itemized charitable deductions and all it asks is that you keep some legal document of the charity that you have made. Ask for a donation letter from the institution you paid money to. This simple step can keep an IRS audit away.

Speaking simply, the IRS does not want the taxpayers to take undue advantage of the tax breaks that it hands out. Claim the ones you are eligible for and the IRS is more than happy to give you a tax refund. In 2020 only, the IRS has processed an average refund of more than $2,800. This tax year, the IRS is looking to process more. Get an expert to the table, if necessary, and make appropriate claims without attracting an audit.

And if you do manage to get a tax refund this tax season, consider using some of it to finance used cars in Spartanburg. At Family Auto, you can trade in your old car for attractive rates and pay as much as you can as extra down to reduce your net loan burden. We also help you with bad credit financing. And we work hard to get you the used car you want. Our inventory of used cars for sale runs deep where you get quality vehicles in almost all price brackets.

Use your tax refund money wisely. After all, you have earned every penny of it by working hard. Visit Family Auto buy here pay here in Spartanburg for the best used cars and trucks and own the asset you deserve to have.


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