Top 7 IRS Audit Triggers Real Estate Investors Need to Know

The IRS has stated this conclusion may lead to an examination . The IRS also usesForm 990to identify governance issues that they feel can lead to non-compliance. The numerous questions in the 990 related to board and management governance provide the IRS with insight irs audit into organizations that may be more likely to have issues that should be examined. Unreported income from “crowdfunding.” Entrepreneurs, artists, charities, and others may find it easy today to raise money on the Internet through crowdfunding websites.

A business’s primary purpose is to make money, and reporting losses year after year is a red flag for the IRS. Businesses hire independent contractors instead of employees to avoid paying state payroll taxes—including unemployment and disability. Companies also don’t have to pay federal payroll taxes for these contractors, including the employer portion of Social Security and Medicare. States are always on the lookout for businesses with large numbers of independent contractors. So this tax audit trigger often originates with state tax agencies rather than the IRS. If you have a vehicle that’s used exclusively for business, you may be able to claim a deduction for the depreciation on the car.

Can the IRS audit you every year?

This is because the IRS can match all third-party documents. Each information reporting document has a Copy A, B and C. Copy A goes to the IRS, which they then use to reconcile your tax return. Therefore, make sure you have received and included all income reports. You may have heard jokes or other light-hearted comments about IRS audits. However, actually receiving an audit selection letter from the IRS is usually not a laughing matter.

All of these expenses are listed on Schedule C of their tax return, which goes through the DIF system to compare your return to the norm of tax returns for other professions. The IRS is on the hunt for taxpayers who sell, receive, trade or otherwise deal in bitcoin or other virtual currency or other digital asset and is using pretty much everything in its arsenal. As part of the IRS’s efforts to clamp down on unreported income from these transactions, revenue agents are mailing letters to people they believe have virtual currency accounts.

What Triggers an IRS Audit? And Am I (or My Business) at Risk?

Using online accounting software helps you keep track of cash transactions. The software stores transactions, produces reports, and more. It can be difficult to keep track of cash transactions for an all-cash business. With checking and credit transactions, you receive a bank statement detailing each entry.

To prevent an IRS audit, it’s important you do your due diligence to prepare and file your individual tax return accurately. At Community Tax, we provide tax audit help so you don’t have to go through this complicated process alone. Our tax audit representation is second-to-none, and we’ll ensure you navigate these challenging waters with ease and a positive outcome. If you’re making too much or too little income, your chances of getting audited by the IRS are increased.

Common IRS Audit Triggers

You’re essentially asking the Treasury for a refund; of course, they’ll want to double-check your claim. Why aren’t specialty tax credits like the R&D tax credit and cost segregation on this list? However, deductions that are not in line with your business model or disproportionate to your income are a significant tax audit trigger. A large increase in deductions or expenses compared with the previous year is also likely to attract attention. There are a variety of tax deductions that can lower your tax liability for the year. However, this doesn’t mean you should try and claim every tax deduction. Claiming a deduction that you’re not eligible for or a significant number of deductions can increase your chances of getting audited.

Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction. The IRS allows you to deduct company purchases on your business tax return. But, the items must meet certain qualifications set by the IRS. If the item doesn’t meet the IRS’s criteria, you cannot claim the business expense deduction. The IRS is particularly interested in taxpayers who have assets and cash stashed in other countries. The IRS has ramped up its rules for overseas assets as well as its scrutiny of such tax returns. Don’t stretch the truth when filling out your tax returns.

Making a Lot of Money

Having an ITIN does not change your immigration status. You are required to meet government requirements to receive your ITIN. The IRS is eyeing legal marijuana firms that take improper write-offs on their returns. Agents come in and disallow deductions on audit, and courts consistently side with the IRS on this issue.

Don’t hesitate to take deductions you are legally entitled to. However, do make sure to spend the time necessary to make sure that you have all your records at hand in case of an unwanted IRS visitor. Or for example, if your rental property income is your only source of income and you declare significant losses year on year they might wonder how on earth you are paying your bills. When the numbers don’t obviously make sense, you are more likely to attract a little more attention which could turn into a full audit of your financials over the last few years. US Mastercard Zero Liability does not apply to commercial accounts . Conditions and exceptions apply – see your Cardholder Agreement for details about reporting lost or stolen cards and liability for unauthorized transactions. By authorizing H&R Block to e-file your tax return, or by taking the completed return to file, you are accepting the return and are obligated to pay all fees when due.