An IRS audit is an unnerving experience. After all, taxes are a personal and vulnerable matter, and the IRS has an impressive reputation with the public.
For this reason, many taxpayers are curious about what causes an IRS audit – and it’s an important question to ask.
It can feel like an audit by the IRS, but it’s different. The audit process starts when the IRS selects tax returns for review, and it’s possible for taxpayers to ensure that there is an established recovery.
We’ve created this guide to show them what to expect. Let’s get started!
What Causes an IRS Audit: Unreported Income
The IRS receives information about taxpayers’ income from many sources, including employers, banks, and financial institutions. If the IRS finds a discrepancy between the income reported on your tax return and the payment reported by these third-party sources, they will likely launch an audit.
If you audit, you will be asked to provide documentation to support the claims made on your return. It is advisable to have a tax audit representative present during the audit process to ensure that your rights are protected and to help you understand the questions asked during the audit.
Deductible Expenses
The most common reason for an IRS audit is incomplete or inaccurate records when documenting deductible expenses. It can be as simple as forgetting to include a receipt for a business lunch meeting or not keeping track of mileage driven for business purposes.
Lifestyle
The IRS audits taxpayers based on several factors, but one of the most important is lifestyle. If your lifestyle differs significantly from the average taxpayer, you’re more likely to be audited.
It is because the IRS is looking for any signs of tax fraud or evasion, and a lavish lifestyle can signify that you’re not paying your fair share of taxes. So, if you want to avoid an IRS audit, keeping your lifestyle moderate and avoiding any conspicuous displays of wealth is best.
Changes in Filing Status
There are many causes of IRS audits, but “Changes in Filing Status” is one of the most common. It can happen when a taxpayer files as Single when they should have filed as Married Filing Jointly or when they file as Head of Household when they should have filed as Single. The IRS may also audit your taxes who have changed their filing status from one year to the next or who have filed an amended return.
How to Avoid an IRS Audit
What causes an IRS audit? Common errors on your tax return are claiming too many deductions or failing to report all your income. If audited, the best thing to do is to remain calm and cooperate with the IRS. They will likely ask you for supporting documentation for your claims, so keeping good records is essential.
We also have other things that can help you if you need more guidance for your financial life. Keep visiting for more guides and information on making the most of your money.
