Generally, the IRS does not audit a vast majority of taxpayers. But there are certain red flags the IRS looks for in your tax filing, which increases the chance that you could be audited.
As a matter of fact, 14% of American taxpayers feared getting audited by the IRS. But in reality only 1% were actually audited. That’s because their returns had certain factors that the IRS looks for when processing tax returns. Here are the 4 factors that increase the chance that you can get audited by the IRS.
Factor #1: You filed a paper return.
That’s not a smart move. You can easily draw the attention of IRS by filing a paper return, as paper returns increase the chance that you could make a mistake in the calculation. Also, there could be a problem with your handwriting; it may not be legible enough. Paper returns have a high error rate of 21%, compared to an error rate of just 0.5% in e-filed returns.
That’s why you should always use an accounting software such as QuickBooks Cloud or Tax software hosting; you can easily rent these services for a small monthly fee.
This would allow you to file your tax returns no matter where you are, and on any device. Plus, you can pay for our plans on a pay-as-you-go basis. You only need to subscribe to any hosted QuickBooks plans when you are actually filing taxes.
Factor #2: Claiming a home office deduction.
A home-office deduction is the most common deduction used by people with home-based businesses. Now, home-office deduction is not a slam dunk, as you might imagine. This deduction is allowed only for space that is dedicated entirely to work. So if you use your bedroom for your home office; that is not covered under the deduction. You cannot use your living room as a home office, which is the room where you entertain your guests or watch football on TV.
Factor #3: You make a lot of money.
If you have an income of $200,000 or more, you can be noticed by the IRS. The IRS watches high income tax returns closely, much more so than it looks at low income returns. This is because the IRS has limited number of staff, so catching an error in a high income range would provide it with a much higher ROI than catching an error in a low income range. That’s why the audit rates for those who earn a high level of income was pretty high - 6.21%, 10.53%, and 16.22% for those earning $1 million, $5 million, and $10 million respectively.
Factor #4: Claiming too many business expenses.
It is possible that you have claimed far too many business expenses. The IRS does not mind offering deductions on business expenses as long as they are "ordinary and necessary." So, say you have a small business and you have purchased a new workstation. That is an essential that you can write off. But you cannot write off the new Xbox 360 that you have purchased for your child. The question to ask before writing off any expense is whether it is essential for your work or not.
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