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What are the different ways the IRS can audit your taxes?

As an adult responsible for filing and paying your own taxes, the word audit might send a shiver down your spine. After all, an audit usually only occurs if the Internal Revenue Service (IRS) has reason to believe that there are omissions or errors in your tax return. Conflicting tax documents or unreported income can be common sources of issues.

Audits can sometimes lead to financial repercussions for individuals. In certain cases, an audit that finds that someone substantially under-reported and underpaid their taxes could even result in criminal charges. Still, despite the potential complications that an audit can represent, receiving notice that the IRS intends to audit you should not be a reason for you to panic.

It isn't too late to file or pay your 2019 income taxes

Whether you run your own small business, pay your quarterly taxes as a self-employed independent contractor or just have had too much on your plate in recent weeks to think about filing your annual tax return, you probably know that the longer you wait to file your return and pay outstanding taxes you still owe, the more interest and penalties the IRS will assess against your balance of taxes owed.

Historically, Tax Day in the United States is April 15, with the exception of years where that day falls on a Sunday. Both federal and state tax returns typically must gets filed by April 15. Unless your return is electronically submitted by the 15th or your mailed return and tax payment has a postmark of April 15 or earlier, you may worry about those penalties that the IRS will assess you.

What is innocent spouse relief on income taxes?

When people divorce, there are often some surprises that come up in the process. Unfortunately, some people might realize that their spouse didn't handle something related to income tax returns properly. This can lead to a tax liability for both parties, including the one who didn't have any idea that there was an issue.

Some individuals opt to file a Form 8857, which is the Request for Innocent Spouse Relief. This is an important tool that you can use if you're being held liable for a tax obligation that you shouldn't be.

Consider the pros and cons of U.S. Tax Court

People who have to deal with issues with the Internal Revenue Service know that the processes you may have to go through are challenging. Being audited can feel stressful but working with someone familiar with tax law might be beneficial.

Many people don't realize that if an audit isn't resolved in their favor that they have some recourse. The auditors can assess penalties, interest and tax adjustments to your account. An appeal can sometimes do away with some of these penalties, but you might not be satisfied with the result. In that case, you can file a petition with the U.S. Tax Court.

Are you liable for your spouse's tax mistakes and fraud?

Taxes can be very stressful, and many people will do just about anything to limit how much they have to pay. There is a fine line between tax avoidance, a legal effort to minimize your tax obligations, and tax evasion, the illegal avoidance of taxes you have a responsibility to pay. Cases of tax evasion often involve fraud, inappropriate deductions or the intentional under-reporting of income.

However, not everyone implicated via an inaccurate tax return knowingly commited any kind of tax fraud or evasion. It is common in married couples filing joint tax returns for one person to assume responsibility for filing the taxes and maintaining all the financial records related to those filings.

Audit red flags the IRS looks for

Worried about getting audited? Most people -- and especially business owners -- worry at least a little bit when tax season rolls around. Even if you feel like you did everything correctly, you're concerned that you may have overlooked something or at least that the IRS won't believe everything is on the level. Whether it is or not doesn't change how stressful an audit can become.

One thing you can do to avoid an audit is to understand what red flags the IRS looks for. They do not have the time to audit everyone, so they target individuals who meet certain criteria. Some of the main things they watch out for include:

  1. Businesses that repeatedly report losing money. In a five year stretch, if you report a loss more than twice, that's a red flag. Losing money in the majority of cases makes the IRS wonder if you have doctored the books to look like you lost money when you actually did not.
  2. Excessive entertainment, travel and meal deductions. You can deduct many of these things, and perhaps your reports are completely legitimate. This is still a red flag for the IRS, though. They may think that you are making up deductions or that you're using deductions for personal travel, meal and entertainment expenses. It's fine to take business trips, but you cannot simply write off every trip you take merely because you own a business.
  3. Filing late or missing deadlines. You definitely want to file on time, every time. You need to know what the deadlines are and if they're different for your business than they would be if you were just filing as an individual. While paying taxes late does happen accidentally, if you do this repeatedly, the IRS is going to wonder why. As with losing money, that repetition really raises a red flag.
  4. Saying that you used a vehicle for nothing but business. You get to pick a percentage when you file for use of a business vehicle. If you pick 100%, the IRS may wonder if that's possible. Are you using your personal vehicle and writing off trips that have nothing to do with business? Or do you actually have multiple vehicles, with one that you save only for business?

Can you receive a first-time penalty abatement for unpaid taxes?

Receiving a notice from the IRS that they suspect that you have underreported your income or underpaid your taxes can be a frightening experience. After all, the Internal Revenue Service (IRS) has the authority to garnish your wages or even prosecute you for tax fraud. If you forgot to file your taxes, didn't pay enough or failed to make a deposit, you could face penalties and fees, as well as still being responsible for the amount you owe.

Don't panic just because you received a scary-sounding letter from the IRS about your taxes. In some cases, a mistake is responsible for the notice that you received. It is possible for IRS agents to make mistakes when reviewing tax files. You could face accusations related to the actions or inaction of another person with a similar name, birth date or social security number.

Could filing your business taxes cause trouble with the IRS?

Business owners often have to perform a wide range of tasks for the company that they start and run. While you may not have had any experience with financial record-keeping before you started the business, you may start to perform minor accounting tasks as a way of keeping costs low for your company.

Software can make it easy to track account balances and withhold the proper amount of employment taxes. It's only natural that those who handle their own financial records may also decide that filing their own taxes for the business would be an affordable alternative to paying hundreds of dollars for professional accountants to prepare the tax return.

What happens if you receive a letter of deficiency from the IRS?

If you are like most Americans, you pay your taxes, but you try to avoid overpaying them by making sure you get all the right deductions and tax credits. After all, who wants to send Uncle Sam more money than he's entitled to from the paycheck you work so hard for?

Trying to minimize tax obligations and be smart about what you file and what you write off can help you financially, but it can also open you up to potential issues in the future. For example, you could accidentally pay less than you owe, leaving you vulnerable to action by the Internal Revenue Service.

IRS can take your passport if you have high tax debt

Delinquent tax debt can be a heavy burden for you to bear. The IRS can put a lien on your home or garnish your wages. They can often do this automatically or without the use of a court order. They can also revoke your passport.

If you have what the IRS calls “seriously delinquent tax debt,” the IRS can ask the state department to revoke your passport or deny an application or renewal. Until you can satisfy your debt, you will not be able to use your passport for international travel.

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