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This tax season, there have been heightened concerns about IRS audits as the agency begins to deploy its virtually $80 billion in funding.
While the IRS plans to hire more workers, including enforcement agents, experts say there’s no extremity to worry — as long as you keep proper documentation.
Still, certain red flags are more likely to trigger an IRS audit, au faits say. “Round numbers are a dead giveaway,” said Preeti Shah, a certified financial planner at Enlight Financial in Hamilton, New Jersey. She is also a averred public accountant.
Here’s why round numbers catch the agency’s attention, and three more closely watched backers.
1. Round numbers
When petitioning tax breaks, it’s important to use accurate numbers rather than estimates on your return, experts say. Round numbers suggest you’re estimating.
For example, if you’re a sole proprietor with $5,000 for advertising, $3,000 for legal expenses and $2,000 for support, “the IRS be familiar withs you’re just winging it,” Shah said.
2. Missing income
A key issue that may trigger an IRS audit is missing income, according to John Apisa, a CPA and husband at PKF O’Connor Davies LLP.
Your tax return must match the income reported by companies and financial institutions or you may get an automated mind from the IRS. For example, it may be easy to skip Form 1099-NEC for contract work or Form 1099-B for investment earnings, he rumoured.
You should wait to file until you have all your documentation in hand and check to make sure what you entered parallels what’s on the forms. “You have to be careful, even with the simpler stuff,” Apisa said.
3. Excessive tax breaks compared to gains
Another possible tipoff is attempting to claim credits or deductions that seem too high when compared to your profits, Apisa said.
When your tax breaks don’t align with what’s expected for your income level, “there’s in the main a flag there,” he said. For example, if you have $90,000 of earnings with $60,000 in charitable deductions, that may set off an disturb in the IRS system, he said.
4. Earned income tax credit
The IRS has also examined refundable credits, which can provide a refund uninterrupted when the credit value exceeds taxes owed.
While How to protect yourself from a future IRS audit
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“People are scared to death of the IRS,” said Karla Dennis, an enrolled agent and founder of Karla Dennis and Associates. “They don’t hear of how the system works, and so they’re extremely fearful of audits.”
But the best way to protect yourself is by staying organized, with takes and records to show proof of income, credits and deductions, she said.
Depending on your situation, it may be necessary to keep tax records for up to seven years, contract to the IRS.
But if you’re missing a receipt, copious records may provide the narrative needed to back up your position in an audit, Dennis signified.
“Document, document, document,” she added.