Filing your taxes incorrectly can result in an IRS audit, penalties, and various complications. A tax attorney outlined four common triggers for IRS audits that he has encountered. He emphasized that maintaining thorough records can significantly help in avoiding tax errors.
Taxes can be quite complex, and making mistakes during the filing process can exacerbate the situation—leading to unexpected correspondence from the IRS and potential penalties. According to Stephen Weisberg, principal attorney and founder of The W Tax Group, specific areas in tax filings are particularly susceptible to errors.
While the IRS often automatically corrects minor mistakes and typographical errors, obvious discrepancies can prompt an audit. Fortunately, taking proactive measures can greatly reduce your chances of receiving an IRS notice. Below, Weisberg shares the top four mistakes that may trigger an IRS audit, along with advice on how to prevent them.
1. Missing Income
One prevalent reason for an IRS audit is surprisingly simple: failing to report all sources of income. The IRS receives copies of all your income documents, allowing them to verify what you’ve reported on your tax return.
Weisberg notes that this issue frequently arises with 1099 forms, which may not always be issued by your primary employer. “Income from investments, such as stocks or interest, can easily be overlooked,” he explained. If the income you report does not align with the IRS’s records, it may trigger an automatic audit.
To avoid making this mistake, it’s crucial to maintain organized records. If you have various income sources, double-check that you received the appropriate tax forms for each. It’s also wise to wait until all documents are received before filing. The deadline for employers and other income payers to provide you with your tax forms is typically January 31. If you haven’t received a W-2 or 1099 form that you expect, follow up promptly with the responsible party.
2. Inflating Business Expenses and Underreporting Income
Owning a small business introduces additional complexities when it comes to taxes. Business owners, including solopreneurs, report their earnings and expenditures on Schedule C of Form 1040.
Weisberg points out that if you claim large business expenses, the IRS might suspect that you’re misclassifying personal expenses as business losses, or exaggerating your deductions. While it’s common for small businesses to incur losses, consecutive years of posting losses might lead the IRS to question the business’s validity.
Businesses that handle a significant amount of cash transactions, such as barber shops, restaurants, and beauty salons, face increased audit risks since the IRS may investigate underreported income. Regularly reviewing your income and transaction records can be beneficial in such cases.
3. Home Office Deductions
Small-business owners may be eligible to claim home office tax deductions if they work from home, but this deduction can bring its own set of challenges. “In today’s remote work environment, the home office deduction frequently leads to audit issues,” Weisberg noted.
To claim this deduction, the space must be used exclusively for self-employment activities—not for any W-2 job. “It has to be dedicated for business purposes, and you must adhere to specific guidelines while keeping accurate records,” Weisberg explained. Any inconsistencies might trigger an audit, as the IRS scrutinizes home office deductions closely.
There are two methods for calculating the home office deduction. The simplified method allows you to claim $5 for each square foot of home office space, with a maximum deduction of $1,500. This approach eliminates the need to track individual expenses. Conversely, the direct method permits you to deduct a percentage of your overall home expenses (like rent, mortgage, internet, and utilities) based on the proportion of your home that your office occupies. While this method may yield a larger deduction, it demands detailed recordkeeping, so Weisberg advises exercising caution if you choose it.
4. Vehicle Expenses
Small-business owners can also deduct vehicle-related expenses. However, if the vehicle is used for personal purposes as well, blending these deductions could raise flags with the IRS, Weisberg cautioned.
You can calculate vehicle-related expenses based on total mileage or by deducting specific business-related costs. If the vehicle serves both personal and business needs, sum up all car-related expenses and multiply that total by the percentage of business miles driven.
Weisberg has observed individuals facing scrutiny from the IRS for overstating their business mileage. “If your claimed mileage seems unreasonable compared to your income or the nature of your business, the IRS is likely to investigate,” he warned. To ensure you’re accurately claiming this deduction, keep a meticulous log of each instance you use your vehicle for business purposes, documenting mileage, date, and start and end locations.
