5 Reasons Why an Audit is Triggered

Facing an IRS audit can be daunting, but understanding why audits are triggered and preparing accordingly can help you handle the process with confidence.

Here are five common reasons an audit might be triggered and essential steps to ensure a smooth audit experience:

5 Reasons Why an Audit is Triggered

1. High Income
   • Higher-income individuals are more likely to be audited due to the complexity and higher stakes of their tax returns.
2. Large Deductions
   • Claiming unusually large deductions relative to your income can raise red flags and trigger an audit.
3. Reporting Errors
   • Inaccurate or incomplete information on your tax return is a common reason for an audit. The IRS uses automated systems to detect discrepancies.
4. Random Selection
   • The IRS randomly selects a certain number of returns for audit each year as part of its compliance efforts.
5. Red Flags
   • Certain items, such as home office deductions, large charitable contributions, or significant business expenses, can attract the IRS’s attention.

Steps to Ensure a Smooth Audit Experience

1. Organize Your Records
   • Ensure all your financial documents are well-organized and easily accessible. This includes receipts, invoices, bank statements, and tax returns from previous years.
2. Review Your Tax Returns
   • Before the audit, review your tax returns for accuracy. Look for discrepancies, unusual items, and areas that might raise questions.
3. Understand the Audit Notice
   • Carefully read the audit notice to understand what specific information the IRS is requesting. This will help you focus your preparation on the relevant documents and details.
4. Consult a Professional: The Importance of an Enrolled Agent
   • Engage with an experienced accountant or tax professional. Having an Enrolled Agent (EA) on your side can significantly reduce the stress and complexity of an audit. An EA is a federally authorized tax practitioner with expertise in tax law and IRS audit procedures. They can represent you before the IRS and provide valuable guidance and representation.
5. Prepare Explanations
   • Be ready to explain any unusual or complex transactions. Clear and concise explanations can help address any questions the IRS may have. Having detailed documentation to support your explanations is crucial.
6. Provide Detailed Transaction Proof
   • The IRS will require proof of all transactions. This includes the date of the transaction, amount spent, vendor name, and purpose of the payment. Additionally, the IRS will match these details to your bank statements as proof of payment. Ensuring all these details are accurately documented will facilitate a smoother audit process.
7. Stay Calm and Cooperative
   • Approach the audit process with a cooperative attitude. Answer questions honestly and provide the requested documents promptly. Maintaining a professional demeanor can help facilitate a smoother audit process.

Consequences of Not Complying with Audit Requirements

1. Lack of Proof of Expenses
   • If you cannot provide proof of expenses, the IRS may disallow the deductions, resulting in additional taxes owed, plus interest and potential penalties. This can include an accuracy-related penalty of 20% on the underpayment of tax attributable to negligence or disregard of rules and regulations​ (IRS.gov)​.
2. Failure to Respond to IRS Letters
   • Ignoring IRS correspondence can lead to the escalation of enforcement actions, including liens, levies, or garnishments. Non-response may also result in the IRS making adjustments to your tax return without your input, often leading to higher tax liability and additional penalties​ (IRS.gov)​​ (TurboTax)​.
3. Negligence
   • If the IRS determines that you were negligent or committed fraud, severe penalties can be imposed, including accuracy-related penalties of 20% for negligence and up to 75% for fraud. In extreme cases, criminal charges may be filed​ (IRS.gov)​​ (IRS.gov)​.

How to Avoid Audits

While there is no guaranteed way to avoid an audit, following these best practices can reduce your risk:

• File Accurate and Complete Returns: Ensure all information on your tax return is accurate and complete. Double-check for any errors or omissions.
• Report All Income: Make sure to report all income, including any freelance or side income.
• Be Cautious with Deductions: Claim only legitimate deductions and ensure you have proper documentation to support them.
• Avoid Cash Transactions: Whenever possible, use checks or credit/debit cards for business transactions to maintain clear records.
• Consult a Tax Professional: Regular consultations with a tax professional can help ensure compliance with tax laws and reduce the likelihood of errors.

Zara Financials helps clients avoid audits by meticulously preparing accurate and complete financial records in advance, ensuring compliance with all tax regulations. Our proactive approach and expertise in tax law reduce the risk of triggering IRS scrutiny, giving you peace of mind.

Contact info:

916-413-7173

save@zarafinancials.com