What Does It Mean to Be Audited by the IRS?

What Does It Mean to be Audited by the IRS - Rush Tax Resolution

If you receive an IRS notice, it can be extremely stressful. But what does it mean to be audited by the IRS? What are your options to resolve it? 

An audit from the IRS is not necessarily routine, but it isn’t something to immediately fear, either. If you aren’t being audited by the IRS, then it might calm your nerves to know that the IRS audits fewer and fewer people with each passing year. There has been as much as a 23 percent decline over the last two decades in IRS audits, with as few as 0.45 percent of incoming individual returns seeing an audit in 2019, compared to a relatively staggering 5.6 percent in 1963.

While the IRS does promise that audits will begin to rise in the near future, and is gearing up by training more auditors, it’s still something that’s somewhat unlikely to happen to you. But the IRS audit process can happen. And not always for the reasons you might expect. Let’s take a look at why the IRS audits taxpayers, to begin with, and what it might look like to be audited by the government.

What Does It Mean to Be Audited by the IRS?

The Internal Revenue Service is in the business of ensuring that the tax gap remains minimized, utilizing both human auditors and computer programs to discover and investigate financial anomalies, usually those that occur between individual returns and information returns generated by banks and other financial institutions. In other words, if the information provided by a taxpayer on their tax return is not congruent with the information provided by banks and employers, then a system within the IRS throws up a red flag.

Sometimes, it’s just a simple math mistake. In many cases, the IRS will even sort it out for your and send you a bill afterward – or take the difference out of a tax credit you qualified for. If the differences become more serious if details go overlooked, if certain deductions don’t make any sense, or if the income in question is very, very large – usually over $1 million per year – the likelihood of an audit goes up considerably. It is at this point that the IRS takes one of two approaches.

Different Types of IRS Audits

Tax audits occur either in person or on paper. The former is either a field audit or an office audit, while the latter is a correspondence audit. Field audits are usually the more serious of the three.

Correspondence Audits

Correspondence audits usually involve simple misunderstandings or questions regarding certain anomalies, such as unusually high income for the given profession and location, or deductions that do not make sense. By providing simple financial proof to justify your home office deduction, for example, or explain why you earned much more this year than the last, you eliminate suspicion, and the IRS moves on.

Field Audits

A field audit might require a little more work. The IRS will visit you in person to ask questions regarding your income and tax returns. In cases where criminal tax fraud may be involved, the IRS may even audit you simply because you have a connection to someone else being investigated.

Office Audits

In an office audit, the IRS will ask you to come to them.

How Do You Know You Are Being Audited by the IRS?

Regardless of how you are being audited, you should always be notified via mail. The IRS does not initiate audits over the phone. This is to protect your data and privacy and prevent taxpayers from falling prey to phishing scams and other dubious activities. The IRS will request different documents depending on the exact nature of what triggered the audit. Examples of what the IRS might want to see include:

  • Receipts for major purchases, especially business-related receipts;
  • Bills of any sort;
  • Canceled checks;
  • Legal papers, including detailed service costs and receipts;
  • Loan agreements;
  • Travel tickets;
  • Medical account statements, physician statements, contracts for medical care, and other financial records related to healthcare;
  • Employment documents;
  • And other related financial items.

Note that you are required to hold onto this type of information for at least three years after the tax return related to any given item was filed. This is also typically as far as the IRS is going to audit you in most cases (with specific exceptions, such as criminal activity).

Why Does the IRS Audit Taxpayers?

There are two major reasons why the IRS will audit a taxpayer’s account. These are:

  1. Because of a red flag that requires investigating. This could be anything from a simple math mistake to a sign of potential fraud.
  2. In connection with another investigation, especially if fraud or other crimes are involved.

There are a few red flags that may call the IRS onto your account more so than others. In no particular order, certain risk factors that increase the likelihood of an audit by the IRS include:

  • Very, very high reported income, or very, very low reported income;
  • Discrepancies that show unreported income;
  • Large cash deposits;
  • “Structuring” cash deposits, by making smaller, albeit frequent deposits;
  • Signs of excessive spending compared to income;
  • Too many itemized deductions (which you may not qualify for);
  • Math mistakes;
  • Claiming hobby expenses and revenue as business expenses (they probably aren’t);
  • Foreign assets;
  • And more.

Some believe that you can be audited by the IRS as part of a routine “audit lottery”. This may be based on chance and doesn’t really mean that anything in your account or return caused suspicion. Whether or not there is such a thing as an “audit lottery” remains up for debate. In 2011, commissioner of the IRS Doug Shulman declared the audit lottery as a myth. The statement made at the National Press Club explains that audits are based on “sophisticated risk models”, and that the IRS looks back on the data gathered through individual returns and information returns to find potential cases of fraud, or simple mistakes.

Do You Need Professional Help?

The majority of taxpayers will never be audited by the IRS, and most of those that will are likely to receive a piece of mail asking for a few documents, followed by a small bill. But if an audit into your finances and taxes becomes more than that, you may want to consider getting professional tax help – not only to work your way through the investigation and ensure that things go as quickly and smoothly as possible but to prepare your tax returns in the future and avoid the same mistakes and misunderstandings. Taxes don’t have to be complicated – especially if you get IRS audit help.

How Far Back Can the IRS Audit You?

How Far Back Can the IRS Audit You? - Rush Tax Resolution

How far back can the IRS audit you? Here’s what you should know about the IRS audit process, and what to do if you receive a notice.

One of the IRS’s main functions is to investigate tax fraud. The government has a vested interest in tackling tax fraud, even more so than tax negligence or tax tardiness, because the former requires malicious intent and manipulation.

But because the IRS has to sift through the data of millions of US taxpayers every single year, it automates a good portion of this process to skim through to the most suspicious accounts. This generally means that many Americans who are initially scrutinized by the tax man are innocent – and for that reason, IRS investigations range from near harmless (for the majority of cases) to serious.

If you’ve received notice that the IRS is going to audit you, the last thing you should do is panic. Audits happen randomly at times when testing a new system, and audits may be triggered by any number of potential reasons – none of which immediately implicate you in any sort of crime.


How Far Back Can the IRS Audit You?

Furthermore, the IRS cannot audit or investigate every shred of tax information on you, and have time limit on how long they can audit you. How far back can the IRS audit you? As of today, the IRS can audit either:

      • Any tax return filed in the last three years.
      • Any tax return filed in the last six years, if the IRS sees reasons to dig deeper (such as substantial underreporting or foreign assets, which can prolong the investigation).
      • Any tax return filed ever, indefinitely, if you never filed your taxes to begin with or are being investigated for tax fraud.

The more severe the IRS’s suspicions, the more thorough the audit. The IRS also has the ability to extend the tax assessment period, or the statute of limitations, given certain circumstances. More about these in Publication 1035.


When Does the IRS Perform Audits?

Audits are triggered by one of three reasons:

      • As part of an ongoing investigation.
      • A random selection in a testing program for the IRS’s computer screening process.
      • A red flag appeared on the IRS’s automated computer screening process.

Unless your tax account is under review as part of an ongoing investigation into someone else, please note that the vast majority of tax audits are a simple matter of having an IRS agent mail you about an audit, contact you to ask about a discrepancy, request some basic financial information confidentially (usually via mail), and make a simple decision based on the information. This decision will be one of three:

      • Decide that you owe the IRS more money.
      • Decide that the IRS owes you money.
      • Decide that no change will be made to your tax account.

Any decision made by the IRS can be protested and appealed through the Independent Office of Appeals, or through tax court. Be sure to run that idea by your tax professional first, to make sure you have a case.


What’s an IRS Audit Like?

Most audits are called correspondence audits because they occur almost entirely over mail. The IRS will do very little if any telephone calls during the audit process and will never request any kind of sensitive information over the phone. This is important to help distinguish the IRS from a potential phishing scam.

The IRS also provides a lengthy list of industry-specific IRS guides to help taxpayers and businesses learn what to expect. These are basic rules of engagement the IRS follows when conducting an audit. You can also check out this short educational video.

If the audit requires more input than just mail-to-mail correspondence, it may graduate into an in-person audit. In-person audits are conducted either at an IRS office nearby (also known as an office audit) or at the taxpayer’s residence or place of business (a field audit).

The IRS is not trying to intimidate you. Audits are generally boring. Be sure to correspond with your accountant and tax professional to prepare all the information the IRS requested in the letter sent to you, so you can get things over with as quickly as possible.

If the IRS audited you because of a mistake you made, note that you will most likely not get into any trouble. They might cut into a tax credit to make up for the taxes you failed to pay as a result of your mistake, or send you a bill via your tax account, and give you a deadline to pay your balance.


What Triggers an IRS Audit?

There are a large number of factors that go into what triggers an IRS audit, and no one knows exactly how the IRS’s screening process is scripted. We do know that certain mistakes and behaviors cause you to be more likely to be audited. Some basic things that seem to trigger an audit more often include:

      • Underreporting income.
      • Massive income discrepancies.
      • Large and frequent cash transactions.
      • Suspicious math errors.
      • Claiming too many deductions.
      • Rounding up or down constantly.

In other words, anything that might seem suspicious or cause your tax return to look a lot different from the average tax return of someone in your income class and occupation may trigger an automated red flag, requiring a human being to go over the document and contact you if the need for more information arises.


What Happens When the IRS Finds Something?

If the IRS finds a discrepancy and changes your tax account, you will be in debt to the IRS. This is easily fixed by paying said debt. You can check your tax account through the IRS website.

If you were audited as a result of an unfiled tax return, you’ve also got penalties waiting for you. Note that these generally aren’t as bad as you might expect – but they can pile up and become worse the longer you ignore them. The IRS can leverage penalties and interest to pressure you into paying sooner rather than later – which you should.

Failing to pay incurs further penalties, eventually leading to liens and levies. If you’re worried about how you’re going to deal with a tax debt, or have an ongoing tax debt problem, you need to contact a professional.


File Your Taxes!

One of the worst ways to be audited is for an unfiled tax return. This is because there is no statute of limitations on a return that doesn’t exist, so the IRS can hound you until you file it. If you need help with your taxes, speak to our professionals today!

Tax Avoidance vs Evasion: The Fine Line

Tax Evasion vs Avoidance - Rush Tax Resolution

Taxes can be difficult to understand and manage, and they are made even more confusing with the very fine line between tax avoidance vs. evasion.

There is a fine albeit significant line between tax avoidance and tax evasion – one allows you to save hundreds, if not thousands of dollars a year on taxes, while the other can land you in a jail cell.

Understanding the difference – and recognizing tax wrongdoing – is important for the education and safety of every American taxpayer. We all know that the IRS doesn’t joke around, and regardless of whether you’re faced with a litigious agent or hefty IRS penalties, getting on the bad side off the IRS is always an exceedingly bad idea.


What is Tax Avoidance?

Tax avoidance describes utilizing everything at your disposal as per the US and state tax code to minimize your tax burden and maximize your after-tax wealth. Tax avoidance is not illegal. This may include the use of loopholes, from simple ones to much more complicated ones, to reduce or eliminate taxes on certain gains and transactions.

Tax loopholes are not always mistakes or oversights left behind in the creation of tax law – sometimes, these loopholes are deliberately created to incentivize certain businesses and financial activities. In this case, “loophole” is a misnomer. These kinds of deliberate tax avoidance features are tax shields. There are ways for both businesses and individuals to reduce their tax burden without crossing the line into illegality.


What is Tax Evasion?

Tax evasion describes any means through which a taxpayer deliberately underpays or misrepresents their tax burden, to underpay. Therefore, tax evasion is illegal. Tax evasion schemes may include:

    1. Not reporting certain sources of income to the proper tax authorities (such as being paid under the table for weekend jobs)
    2. Misreporting personal and business expenses in order to write off more taxes
    3. Keeping business and personal transactions “off the books” deliberately
    4. Squirreling funds away in offshore accounts illegally

The main difference between a form of tax evasion vs avoidance is whether the action taken to reduce one’s tax burden is illegal. Any form of tax evasion tends to be explicitly illegal according to the tax code. Tax avoidance schemes make use of loopholes or deliberate lawmaker decisions to reduce one’s tax burden.

The intended end result – to pay less taxes – is always the same. What isn’t the same is how the IRS reacts, and what penalties you end up facing as a result of illegal tax activity.


When Is It Legal – Or Illegal?

Tax laws exist to help taxpayers differentiate between illegal and legal forms of reducing your tax burden. Furthermore, tax professionals serve clients by helping them differentiate between the illegal and legal, advise them on tax avoidance strategies, and help them avoid potential forms of tax evasion.

If you aren’t in the mood to get caught up with state tax problems, then working with local tax professionals is your best bet for finding useful tax avoidance tips without steering into illegal territory. Not all states share the same tax laws, and state taxes and federal taxes are levied under different rules and circumstances.

When it comes to federal tax law, the IRS goes through great lengths to educate taxpayers on how they can best prepare their tax returns. This includes the selection and qualification of select deductions. You can also work with a professional and qualified tax return preparer. The IRS encourages the use of qualified tax return preparers, and helps taxpayers stay away from potential scammers.

In other words, whether or not a specific form of tax avoidance is legal or illegal is not a question you should have to ask yourself. It’s a question you should be asking a qualified tax professional.


Common Examples of Tax Evasion

Tax evasion can come in many shapes and sizes. The most common forms of tax evasion include:

    • Underreporting income.
    • Not reporting certain transactions.
    • Not reporting the sale of cryptocurrencies.
    • Ignoring your overseas rental income and other sources of income.
    • Not reporting income from all-cash business.
    • Paying for services under the table.
    • Deliberately not filing a tax return.
    • Failure to withhold tax payments.
    • And more.

If you’re concerned about whether any of your tax habits might translate into tax evasion in the eyes of the IRS, contact a tax professional today.


Common Tax Loopholes and Tax Shields

Useful tax loopholes and tax shields include:

You may qualify for certain deductibles and credits, and not know it. Some deductibles are accessible to people with tuition costs, medical expenses, daycare costs, and more. Donating to charity also helps.


Penalties for Tax Evasion

The legal consequences for intentional tax evasion are severe. There are prison sentences and hefty fines. Tax evasion is a federal offense. Depending on where a person’s tax evasion crime lands in the set categories, they may face a prison sentence of anywhere from one to five years. Fines for tax evasion range from $100,000 per year, to a one-time payment of $250,000 depending on the crime.

Tax fraud and tax evasion are serious crimes. If you have found yourself charged with tax fraud, it’s critical that you seek out an experienced local criminal defense attorney.

On the other hand, if you’re facing a potential IRS audit and have not committed any form of tax fraud or tax evasion, however, you won’t need the help of a criminal defense attorney. In these cases, speak with a tax professional. The IRS can audit taxpayers randomly or because of basic mistakes and discrepancies. During an audit, it is unlikely to levy criminal charges unless the IRS finds evidence that you deliberately avoided your duty as a taxpayer.


Need Help with Your Taxes?

There is a difference between tax evasion vs avoidance. Trying to pay the government less than you owe is illegal. However, doing everything you can to reduce your tax burden is encouraged. If you want to find out how you might be able to reduce your tax burden both in life and in death, be sure to speak with our tax professionals at Rush Tax Resolution.

We can help through tax preparation services, tax consulting, and when you go toe-to-toe with the IRS, we offer legal representation to ensure that the IRS is treating you fairly as in accordance with the Taxpayer Bill of Rights. Contact us today for more information.

The IRS Audit Process: 7 Things to Know

IRS Audit Process - Rush Tax Resolution

Understanding the IRS audit process is essential to determine your best course of action against an audit. Here’s what to know.

There are few things scarier than the prospect of being audited by the government for your hard-earned money, especially when the result might be a heftier tax bill.

Thankfully, IRS audits aren’t as scary as most might think, and even when they do result in a larger-than-expected bill, you have options for appealing against that decision. Here’s what you need to know about the IRS audit process.


1. The IRS Doesn’t Audit Many Taxpayers

Fewer than one percent of US taxpayers are audited per year, and that number has been in a steady decline for decades. Your overall chances of being audited are very slim – and even then, IRS audit notifications need not be particularly scary, nor are they an indictment of the taxpayer, and don’t presume guilt.


2. The IRS Audit Process Rarely Requires In-Person Visits 

The IRS conducts several different types of audits, depending on the nature and scope of the investigation, and the information the IRS has.

The bulk of the IRS’s audits are simple correspondence audits, which typically revolve around asking for and processing information remotely via the mail.

When that isn’t enough, the IRS may ask you to come visit one of their designated offices for an in-person interview. It’s rarer that the IRS requires this level of intervention, but when it does, it is in your best interest to hire a tax professional as a personal representative to ensure that things go as smoothly as possible.

If you fail to respond to any efforts made by the IRS to contact you, they may visit you or your business in the form of a field audit. These usually only occur when the IRS audit process is being ignored.


3. Taxpayers Have Certain Rights When Dealing with the IRS 

The IRS has adopted a Taxpayer Bill of Rights that it adheres to when dealing with taxpayers. Both the Independent Office of Appeals and the Taxpayer Advocate Service uphold these rights. Being aware of these rights can help you understand what you should expect  during the IRS audit process. They include:

    • A right to courteous treatment by IRS employees.
    • A right to confidentiality and privacy with respects to tax matters and personal information.
    • A right to appeal against the IRS, through them or through the courts.
    • A right to know why the IRS is auditing you, and how the IRS will use any information it requests.
    • And more.


4. You Might Have Been Selected Randomly

The IRS utilizes computer programs to automatically sort through the taxpayer information it has and identify red flags. These may include a mismatch between a taxpayer’s tax returns and the information returns provided by their employer or credit companies. From there, a person may sort through the potential red flags and send requests for additional information at random.

In some cases, the IRS may select tax returns at random to start a line-by-line audit. These are used by the IRS to collect certain information to refine the IRS audit process.

The IRS has limited resources after all and can only audit so many taxpayers in any given year. Again, audits may be triggered by simple mistakes or irregularities, and do not automatically presume that you’re in the wrong or are in any way trying to defraud the government. In some cases, the IRS may even find that you’re owed a refund on taxes you’ve overpaid.


5. Low-Income Taxpayers Can Get Audited

In fact, there may be circumstances under which low-income taxpayers are more likely to be audited than their wealthy counterparts. The Earned Income Tax Credit, or EITC, is a tax credit or benefit designed to help employed taxpayers making a low or moderate income. However, the qualifications for this tax credit can be quite strict, and if you claim an EITC or ACTC without carefully outlining your qualifications, the IRS may come knocking to verify your claim.

Alternatively, note that the IRS may also contact you suggesting that you claim the EITC if your tax information suggest that you are qualified, and haven’t done so. Consult a tax professional for more information about what tax credits and refunds you may or may not be entitled to, and how best to go about claiming them.


6. The IRS Never Notifies You Via Telephone

The IRS audit process can be exceptionally frightening – particularly when they’re part of an elaborate phishing or identity theft scam. They take great pains to ensure taxpayers understand how they legitimately establish contact with taxpayers whenever they want certain sensitive personal or financial information, and it’s never via an initial phone call.

IRS audits are always started through a mailed notice, sometimes more than one. When the IRS does call, it’s not to start an audit, but to notify a taxpayer of an overdue tax bill after they’ve presumably received their mailed notice. The IRS may resort to phone calls or even unannounced visits, but only after multiple attempts of contacting them via the mail.

The IRS also never asks for debit or credit card information over the phone and suggests that people make payments via the IRS’s online payment portal instead. If the “IRS agent” on the other end of the line makes threats to coerce personal information, especially regarding revoking professional licenses or immigration status, that’s a giant red flag.

If you think you are being audited by the IRS, be sure to check through your mail first. Next, contact the IRS yourself for more information on your tax account and any outstanding bills.


7. The IRS Can Usually Only Audit Returns Filed Within the Last Three Years

There is a limit to how far back the IRS can audit a tax return, and that limit is about three years. The IRS can seek to extend that limit under specific circumstances, up to six years, or longer if they find that a taxpayer may have been engaging in fraudulent or criminal behavior.

If the IRS needs more time to conduct their audit, they may request an extension of the statute of limitations. You can agree to this if you believe you may be entitled to a tax credit or refund and have the information/evidence to support that belief.


Why Seek Professional Help?

Audits are concluded in one of three ways:

    1. Either the IRS finds that no change is necessary
    2. They find that some changes are necessary and that you agree with them (you may have to deal with a tax bill), or;
    3. That some changes are necessary and you disagree with them.

In both latter two cases, having a team of tax professionals around to help you can be a massive boon.

Rush Tax Resolution brings to the table decades of combined experience in dealing with the IRS, helping clients ensure that their rights as taxpayers aren’t infringed upon while delivering clearheaded advice for dealing with tax problems and potential costs.

What Triggers an IRS Audit?

What Triggers an IRS Audit - Rush Tax Resolution

The mere chance of an IRS audit can feel terrifying – not knowing what you owe and why would put anyone at unease, and the idea that the weight of the government lies behind the inquiry further fuels that fear. But what triggers an IRS audit?

IRS audits often quite straightforward, and they’re also somewhat uncommon. Certain actions and mistakes, however, are more likely to draw the IRS’s attention. Here’s what you need to know.

Understanding What Triggers an IRS Audit

An IRS audit usually occurs whenever the IRS has reason to believe that you’re not paying what you owe.

2019’s audit rate was only around 0.45 percent, down from 0.9 percent in 2009. Note that this still amounts to 771,095 audited tax returns – but it’s a fraction of the tax returns the IRS receives.

The rates rise for specific demographics, as the IRS is more likely to target certain individuals and corporations based on potential to collect on missing taxes. For example, about 3% of Americans earning $1 million or more in annual income were audited in 2018, which is a good deal more than the average audit rate.

But the IRS needs more than a hefty paycheck to justify the resources for an investigation. Knowing what triggers an IRS audit can help you prepare. You are more likely to get audited if:

      • You’ve made mistakes in your tax returns
      • Aren’t declaring income
      • Have too many deductions
      • Or if something just seems plain unusual in your returns compared to other taxpayers in your tax bracket and occupation


Anything That Triggers the DIF 

With millions and millions of American taxpayers, countless tax returns, and a diminishing crew, the IRS doesn’t have the manpower to go through every return and scrutinize it for errors. Instead, it relies on data analysis to do most of the heavy lifting.

While it doesn’t send every return through an algorithm, select returns are analyzed and given a Discriminant Function System (DIF) score, which essentially screens tax returns for red flags based on similar previously analyzed tax returns.

Anything that seems very out of the ordinary on paper – such as huge losses, charitable deductions that equal a substantial portion of your income, and more – will throw up a big DIF score. A human agent then sorts through the highest-scoring returns to pick out ones that will likely require a closer look.


Anonymous Tips and Information Matching

The IRS will investigate individuals who have been credibly accused of or tied to tax avoidance/evasion schemes. For reasons that are obvious, anyone thought or found to be committing tax fraud will be audited by the IRS.

Similarly, the IRS utilizes the information provided by other taxpayers to cross-reference the information on certain returns and ensure that everything is in order. If you fail to declare income that your client or employer already listed as an expense, or if your information doesn’t match up with your employer’s Form W-2 or the bank’s Form 1099 interest statements, then it’s likely to trigger an IRS audit.


Cash Businesses are Heavily Scrutinized 

Spas, salons, taxi drivers, and any other businesses or occupations that typically handle more cash than the average business will often be under more pressure than most businesses, particularly if you own a cash business.

The IRS knows that it’s easier to pocket cash and keep it hidden from the taxman than any money flowing straight into a bank account, where records are meticulously kept and regularly reviewed.

Based on that assumption, they’re a little more quick to consider auditing someone involved in a cash-heavy occupation or the owner of a cash business if things don’t totally add up (such as reporting a low income while driving an expensive car, or paying off a mortgage you shouldn’t be able to afford).


Conspicuously Round Numbers

It’s easier on the eyes and the brain to round up or down when it’s tax season, but if you do it too often, it triggers an IRS audit.

It’s fairly unlikely that they will audit you for rounding up a deductible expense of $49.75 as $50 once or twice, but if all of your reported expenses and earnings are nice, even numbers, they will begin to think that you aren’t being very accurate with your math.


Claiming Too Many Deductions 

Most taxpayers are eligible for one deduction or another, but if you start to go a little haywire with the deductions – claiming large charitable donations, turning personal expenses into business expenses, claiming the total cost of renovating a portion of your home as a home office expense, and claiming that 100% of the mileage on your car was entirely for business purposes – then the IRS will get suspicious. An unrealistic amount of deductions triggers an IRS audit.

Be accurate, even down to how often you use your car for business, charity, and medical moving, and how often you use it for personal use. And be careful with home office deductions. The IRS only considers a portion of your home a home office if you can prove that you use it 100% for work purposes, and nothing else.


Personally Handling a Lot of Cash 

Even if you aren’t professionally involved in any kind of business that traditionally involves a lot of cash, spending or depositing a large amount of it will draw the attention of the IRS, and can trigger an IRS audit.

Anything at or over the $10,000 mark is enough to draw suspicions of illegal activity (or unreported income), and if you try to avoid setting off that limit by depositing smaller amounts over the course of a specific time limit, the IRS will still be alerted and accuse you of structuring your deposits.


Being Your Own Boss

Being your own boss can be very rewarding, but it’s also a lot of responsibility. Employees have to match their tax returns to what their employers report, but someone who is their own employer is in a better position to hide income or declare personal expenses as business expenses/losses, which is why the IRS might pay extra special attention to you.

Furthermore, self-employed individuals and freelancers are privy to a list of business-related deductions listed on Schedule C – but when claiming those deductions, it’s important that you keep a tidy record of all the proof needed to show that you qualify for them, should the taxman come around to check on the integrity of your tax returns. This usually only happens in cases where a person’s deductions are far out of the ordinary for others in the same profession.


Claiming a Paying Hobby is a Business

One mistake some audited individuals make is claiming deductions on expenses related to a paying hobby, misinterpreting it as a business. While some hobbies might pay, the IRS has strict rules about what it considers a business and a hobby.

Hobby expenses are personal expenses, and do not quality for deductions. In order to qualify as a business, you need the records to show that you spent enough time and money on your hobby to turn it into something intentionally profitable, rather than something you just happen to make some money with on the side.


What to Do If You’re Audited 

When the IRS decides to investigate an individual for discrepancies or issues on their tax returns, it’s usually seeking to clear up simple mistakes and collect where it can. Calm down, be cooperative, and coordinate with a tax attorney professional before worrying about anything else. Most of the examinations the IRS performs are automated or conducted over long-distance, via mail. Very few warrant a field examination.

The IRS only aims to come down hard on people who deliberately avoid taxes, particularly if they’re avoiding a lot of taxes. Whatever you do, it’s in your best interest to work with a professional to avoid making any mistakes that might unnecessarily lengthen the process.

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