Most find the possibility of facing an IRS tax audit an overwhelming and intimidating experience. With numerous layers of complexity and the looming prospect of a mysterious meeting with government officials, individuals worry about presenting the information correctly and avoiding the drastic consequences they might face. Fortunately, individuals can work to avoid certain factors that might trigger an audit.
While every situation is unique, there are common factors that could trigger an IRS audit, including:
- Anomalies: Like many industries, the IRS has relied on computer technology and machine learning for years. They have created a computer system specifically designed to track anomalous information on tax returns. These anomalies could center on duplicate information, invalid deductions or improper charitable donations.
- Unreported income: The IRS requires individuals to report all income. People must include everything from earned tips to payments for freelance work on the tax return. Generally, employers provide a 1099 specific to the situation on income over a $600 threshold. If reported income does not match the documents the IRS has received, it could trigger an audit.
- Unexplained income: Whether popularized in entertainment media or created through idle fantasy, people wonder how they could explain a sudden influx of cash. From illegal activity to unreported cash payments for services, any type of significant spending or cash deposits not supported by reported income could be a red flag for the IRS.
- Confusing a hobby with a business: Individuals might confuse their hobby with running a business and attempt to seek benefits through the tax return. There are very specific rules, however, that make up the eligibility requirements.
- Foreign assets: Individuals who maintain assets or cash stores in another country often trigger an IRS audit. Recognizing that certain nations have more favorable tax laws, the IRS rules for overseas assets has evolved. Additionally, this information could increase the level of scrutiny with which a tax return is met.
Many people think an audit falls into an either/or category – either the audit is random, or the IRS investigates specific individuals. In reality, there are numerous trigger events that can increase the likelihood of a tax audit.