The Internal Revenue Service (IRS) uses every available technique and technology in identifying individuals and organizations possibly committing tax evasion and fraud. You, an ordinary taxpayer, is not spared from the possibility of a tax audit especially when you attracted the taxman’s attention due to these triggers.
Significant Decrease in Income
The IRS tracks historic data on income and expenses, thus, considerable changes in income from one year to the next can be a red flag. You may be suspected of under-reporting your earnings although you should not be worried when you have valid reasons and reasonable evidence related to it.
Declaration of Self-employment
While Americans value entrepreneurship, the IRS takes a different view albeit not as negatively as you may think. You may be raising red flags when you claim business expenses, especially on your home office, yet you earn modest income. Your business becomes the IRS business but you can always defend your deductions with documentary evidence.
Failure to File a Form
Since your employer sends copies of your W-2 and 1099 forms to the tax agency as well as to your mailbox, you should be able to file them with your tax return. But when you fail to do so, you may be flagged for a review, which means a letter from the IRS will also find its way to your mailbox.
You should also double-check your forms, as received from your employer, since it may have inaccurate information including the facts and figures on them. The IRS will likely notice the mismatch between your return and the forms submitted by your employer, which means another red flag.
Claim of Losses and Expenses from a Hobby
Keep in mind that there’s a difference between a hobby and a business – according to tax rules, a business should be conducted with a reasonable expectation of earning profits. You can claim expenses and losses as tax breaks if and when these are related to your business, but not to your hobby. Otherwise, you can be charged for an illegal activity when writing off hobby-related expenses.
For example, if you have a woodworking workshop wherein you create wood products for your pleasure, you cannot claim the expenses for wood and tools as tax deductions. But when you sell your creations as part of a small business, you are allowed to do so.
In all of these instances, you can ask a tax consultant from Jackson Hewitt to extend professional assistance in effectively dealing with a tax audit. Better yet, you can hire its services to ensure that you are filing the right tax return at the right time.