The IRS includes a bad reputation as an agency that seeks to squeeze more money out of taxpayers but as long as you are reporting your income appropriately taking only legitimate deductions and not doing anything shady you’re unlikely to ever encounter a tax audit.
Tax Audits: What Are Common IRS Tax Audit Red Flags That Triggers? – Here’s What! (PHOTO: CNBC)
IRS Audit Triggers
The IRS accepts and processes most tax returns without further examination. However, there is an assortment of factors that may draw their attention in a way that would make the return more likely to be audited through a correspondence exam or assigned to an auditor for further inquiry.
Generally, the IRS tends to trigger audits within three years of its filing your taxes, but there are some situations in which the IRS can audit a return after that period.
Here Are Common IRS Tax Audit Red Flags That Triggers
Dealing with Cryptocurrency Transactions
The most popular climb of digital asset transactions involving bitcoin, NFTs, and other cryptocurrencies could trigger a tax audit, even if you haven’t earned any money.
Mismatch in Returns Filed
If you believe the IRS will not notice a little discrepancy between what you report and the forms you accept, you’re mistaken. The IRS obtains all your income documents, such as the W-2, Form 1099, K-1, and others because the parts should fit those included in your tax returns. A mismatch can result in an IRS tax audit.
Claiming Hobbies as Businesses
You can write off business costs but not those from hobbies, Bechtol warned. The IRS can differentiate between hobby and business costs because any profit from a business that is not shown in three out of five years constitutes a hobby. Hence, deductions for hobby expenses are limited.
Excessive Deductions or Tax Credits
According to Sophia Jones, an Investment Analyst at PiggyBank states that claiming an outsized amount of deductions or tax credits can also raise suspicion and triggers a tax audit, “It’s essential to guarantee that all deductions and credits asserted are accurately and legitimately reported.”
Claiming Recurrent Business Losses
Other companies don’t generate a profit right away, including startups. However, according to Carl Jensen, personal finance expert and founder of Compare Banks, several years without a profit can attract the IRS’s attention,
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