When some people hear they are being audited by the IRS, panic sets in. But, there is nothing to worry about, unless you’re trying to cheat the system. The IRS conducts an audit to determine whether you’re reporting numbers correctly and following tax laws. The agency is double-checking to make sure everything adds up correctly in your tax returns. If you’ve filed your taxes honestly for years, you have nothing to worry about.

Typically, less than one percent of tax returns get audited. But, if you find yourself the subject of an audit, it’s important to know about the process and what may have caused the IRS to red flag you. We’re going to take a look at what happens during an audit as well as eight reasons why the IRS would decide to audit you.

What Happens During an IRS Audit?

Most IRS audits happen within two years of filing your return. But, the IRS may go back three years depending on the filing date of your return.

If the IRS is going to audit you, you will get a letter in the mail giving you 90 days to respond. The IRS will ask for further documents regarding your tax return. You may be asked to confirm your income or expenses to make sure you are qualified for the deductions you claimed.

You may also be asked to meet with an IRS representative to talk about your finances. You may also be asked to fill out a questionnaire.

8 Reasons Why the IRS Will Audit You

Several situations will trigger an IRS audit. If you think you fall into one of these categories, you may find yourself in the middle of an IRS audit.

Not Reporting All Income

While you may have reported income from your main job, you may “forget” to report income from a side hustle. You may think you can hide any type of freelance work or work that is not done regularly. But, the company that you worked for has sent a copy of your earnings to the IRS, so they are aware that you have made money that you have not reported.

Claiming Too Many Charitable Donations

Significant charitable donations are eligible for some tax deductions. When a donation is eligible to be deducted, you’ll get a piece of paper for when you file your taxes. If you don’t have the paperwork, don’t claim the donations. Also, if you report that you are donating a substantial amount of your income, it may raise a red flag with the IRS. The IRS may find it hard to believe that you donated more than half of your annual income.

Deducting Too Many Business Expenses

If you are deducting a business expense, it must be a purchase that you made that was necessary to your business and not out of the ordinary. If the purchase you made was a common one for your trade, then it will be deemed ordinary. But, if it’s not something you would use to do your job, you may find yourself in the middle of an IRS audit.

Claiming a Home Office Deduction That Doesn’t Exist

If you work from home one day a month, you can’t claim you have a home office. Under the IRS’ rules, people can only make a home office deduction if they use part of their home regularly and exclusively for their business. The space you’re claiming as a home office needs to be used for that and that only. If you have a section of your home sectioned off strictly for business, you shouldn’t get any questions. But, if you don’t, you may expect some unwanted attention from the IRS.

Using All Round Numbers

It’s very unlikely that every number you’re reporting is going to be perfectly round. Never assume that rounding up to the nearest hundred on every expense is the right thing to do. If you’re claiming an expense of $358.50, you can round up to $360, but don’t take the liberty of rounding to $400. If you do this with every expense, the IRS is going to ask for proof.

You Spend or Deposit a Lot of Cash

As part of the Bank Secrecy Act, many businesses are required to tell the IRS and other federal agencies whenever there is a large cash transaction that involves more than $10,000. The idea is to prevent any illegal activities. When the IRS sees it, they may wonder where the money came from if your reported income and other expenses don’t support it. If you deposit over $10,000 the IRS will be notified. If you file a tax return, you may be asked how and why you got that money.

Claiming Dependents That Don’t Exist

You can’t claim dependents you don’t have. You can’t claim children you don’t have to minimize your taxes. Sometimes claiming the wrong dependents can be an honest mistake. In the case of divorce, both parents may claim the children as dependents when only one should. If you are making up dependents on your taxes, the IRS will find out and you will be audited.

You Own a Cash Business 

If you own a cash business like a salon, restaurant, or bar, the government may think that you’re not reporting all your income. You may “forget” to report some cash you received for services come tax time. Many people think they’ll never get caught. But, if your lifestyle doesn’t support your reported income, the IRS is going to start asking questions. The IRS discovers these types of situations thanks to tips from concerned citizens. 

Need Help with Tax Preparation?

If you want to avoid an IRS audit and need help with tax preparation and planning, Steward Ingram & Cooper PLLC is here to help. We offer tax planning and preparation services for business taxes, personal taxes, estates and trusts, as well as non-profit tax filing. Contact us today at  (919) 872-0866 for financial services you can trust in Raleigh, Durham, and surrounding areas.