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The Internal Revenue Service (IRS) conducts audits to verify the accuracy of tax returns submitted by taxpayers. Although some audits occur at random, certain actions or errors can act as red flags and lead to an audit. In this article, we will discuss four prevalent tax errors that may pique the interest of the IRS.
Discrepancies between your reported income and employer-provided documents often trigger IRS audits. To prevent IRS scrutiny, taxpayers must verify that the income they declare aligns with official tax documents like the W-2 or 1099. This ensures consistency and compliance with tax regulations.
Claiming hobby expenses as deductions can complicate tax matters. If your business has not been profitable for at least three of the last five years, the IRS might reclassify it as a hobby. This reclassification can limit the deductions you can claim for expenses related to non-profit activities, potentially drawing IRS scrutiny. To prevent this, it is crucial to maintain clear financial records for your business and ensure it operates as a legitimate business.
For self-employed individuals, accurate reporting of deductions is essential. If you intend to claim deductions for transportation expenses, it is vital to keep meticulous records of the mileage used for work-related purposes. Deducting your entire personal vehicle as a business expense is a certain way to attract the IRS’s attention. To avoid this pitfall, maintain detailed records of your business-related expenses and ensure they adhere to IRS guidelines.
When itemizing deductions, taxpayers can claim cash donations to recognized charities, as well as the value of donated items like clothing and vehicles. However, if your claimed donations significantly exceed your reported income, it might prompt the IRS to initiate an investigation. For example, if your donations amount to half of your reported income, it could raise suspicions. To prevent an audit in this scenario, maintain precise records of your charitable contributions, including receipts and acknowledgments from the charitable organizations.
It is important to accurately report income, deductions, maintain records, and legitimize business to avoid IRS audits. Seek professional tax advice if you’re unsure about your tax return. By adhering to these guidelines and avoiding common tax errors, you can help ensure a smoother tax-filing process and reduce the chances of attracting the IRS’s attention.
At Gold Accounting Tax, we know you want to be successful in real estate.
In order to do that, you need an in-depth understanding of your financials at any given time.
We understand because we are real estate investors ourselves and understand the specific challenges real estate businesses experience.