Tips for Avoiding a Nightmare IRS Tax Audit

Tips for Avoiding a Nightmare IRS Tax Audit

Many people fear public speaking, spiders, and snakes. Other people fear heights. Another thing that brings people tremendous angst and fear is an IRS TAX AUDIT.

According to John Grissom, Partner in our Lumberton office, who has over 40 years of tax experience, "Unusually high deductions for a taxpayer’s level of income are likely to increase the chance of an IRS audit". One example would be a person making $50,000 and showing $20,000 in charitable contributions. An advantage of working with a qualified tax preparer, is that their tax software provides diagnostics that let them know when clients are outside of these ranges.

Although the chances of taxpayers being audited have declined in recent years, with taxes becoming more complicated every year, there is always the possibility that a tax mistake turns into an IRS tax audit. Avoiding "red flags" like the ones listed below could help. The following information is an excerpt from our November 2022 Tax Newsletter that can be found here.

Claiming Business Losses Year After Year

When you operate a business and file Schedule C, the IRS assumes you operate that business to make a profit. Claiming losses year after year without any profit raises a red flag with the IRS.

Failing to Report Income from Form 1099

Resist the temptation to underreport your income if you are self-employed or have a second job. The IRS receives the same 1099 forms that you do and even if you didn't receive a Form 1099 when you think you should have, you can't be sure the IRS didn't either. If the IRS finds a mismatch, you will hear about it.

Early Withdrawals from a Retirement Account

Generally, if you withdraw money from a retirement account before age 59 1/2, you will need to pay a 10 percent penalty. You will also owe income tax on the amount withdrawn unless you qualify for an exception. Sometimes - but not always - these types of early withdrawals trigger an audit, typically a correspondence audit where the IRS sends you a letter.

Excessive Business Expense Deductions

Too many deductions for your income and type of business, claiming 100 percent use of a car for business, and inflating business meals, travel, and entertainment expenses are examples of excessive business expenses that could raise a red flag. Always save receipts and document your mileage and expenses.

Failing to Report Winnings or Claiming Big Gambling Losses

What To Do if You Are Audited

If you've received correspondence from the IRS in the U.S. mail that indicates that you are being audited, don't try to handle it yourself. Instead, contact the office immediately for assistance.

Taxpayers who have been audited or otherwise interacted with the IRS should know that they have the right to know when the IRS has finished the audit. The right to finality is one of ten basic taxpayer rights - known collectively as the Taxpayer Bill of Rights. All taxpayers dealing with the IRS are entitled to these rights.

If you’re still not sure what you need to do to avoid an IRS audit, help is just a phone call away.

Lee Grissom, CPA, CFE, CISA, is a Partner at the accounting firm, S. Preston Douglas & Associates, LLP. In business for over 80 years and with three office locations, SPD&A offers a wide array of individual and business services in both North and South Carolina. You can contact Lee directly at (910) 739-7523 ext. 307 or by email at lgrissom@spdouglas.com. To learn more about our firm, please visit www.SPDouglas.com.