An IRS audit is something every taxpayer would rather not experience. In order to avoid an audit you have to understand common audit triggers and how to avoid them. Even though the IRS does select some random returns for audit, a certain pattern of behavior can make them look at a specific return. Once you fully understand what can cause the IRS to conduct an audit of your return, you can be more attentive while preparing to file.
A pattern of unreported income or not filing all required 1099 forms can trigger an audit. Tax payers who own businesses or are self-employed must remember to report all earned income. The IRS can easily confirm that the 1099’s in their records correspond with what you report. Discrepancies can incite an audit.
While keeping track of business related expenses that you plan on claiming as a deduction, keep in mind what qualifies an expense as a legitimate deduction. Basically, in order for an expense to be claimed as a deduction it must be directly related to operating your business. To avoid triggering an audit you should keep excellent records of all business expenses and only claim appropriate deductions.
Home Office Deductions
For those who work out a home office, deductions for operating that home office are appropriate. However, in order for a home office to qualify for those deductions it has to meet certain criteria. The space has to be a separate room exclusively used for business activities. Measure the space carefully and make sure your office complies with the IRS’s criteria for a “home office.”
Schedule C Losses
An audit can be in your future if you claim too many losses on your Schedule C. The IRS statistically pays more attention to Schedule C filers who file losses several years in a row. It may appear to those reviewing your return that you have income coming from somewhere else or may not be keeping very accurate records.
Guesses and Estimates
An occasional round number or coincidental pattern will not trigger an audit, usually, but repeated ‘easy’ numbers can look like guesses. You should never estimate on your taxes and the IRS will take notice of income tax return filings that seem full of guesses. If you are unsure how to answer some income questions accurately, seek help or representation.
The best way to avoid an audit is to keep careful records, be 100% honest and seek legal representation if necessary.