Vital Details about Tax Audits

Taxpayers must complete their state and federal tax returns every year and follow applicable tax laws and codes. The IRS recommends hiring a preparer to complete these forms since they understand the laws and codes, and the preparer will avoid common mistakes. The IRS initiates tax audits if they notice suspicious activities and possible discrepancies on tax forms. The taxpayer is flagged, and the IRS sends them a notice with an appointment for the audit. Reviewing details about a tax audit shows taxpayers what they can expect.

A Tax Audit

According to state and federal, they perform a tax audit if the Internal Revenue Service believes there may be some discrepancies on the tax forms. The agents perform the assessments by comparing the taxpayer’s documentation and calculating their deductions and ensuring the totals are correct. They must establish if the taxpayer used legal deductions properly and didn’t inflate their deductions to reduce their tax liabilities. Both federal and state IRS agents can initiate an audit at any time, and the individual must comply by providing the agency their records for deductions and expenses. Taxpayer info is available at Brotman Law.

What Happens First?

The authorities assess the taxpayer’s deductions, as long as the deductions are legal, the individual won’t have to worry about an issue. The auditor reviews the taxpayers W-2 or 1099 and compares the information. They may ask questions about the deductions and ensure that the taxpayer has a legitimate reason for using it. For example, taxpayers cannot deduct the cost of meals unless the meals are linked to their job or entertaining clients.

Next, they perform all calculations to double check each line on the tax form. The primary reason the IRS audits a taxpayer is if they see suspicious activities that could show that the state r federal IRS isn’t receive enough money from the taxpayer. How the taxpayer files their taxes could present some issues. For example, software isn’t infallible, and it could miscalculate some figures causing issues. The agents review the software the individual used.

Reporting All Income

The IRS wants to know all income sources for the individual and ensure that they add all income to their tax forms. All wages they earn appear on their W-2, and any cash payments that weren’t included in their earnings must be reported on a 1099. Any evidence of cash payments that weren’t included on the individual’s tax documents could lead to more tax liabilities and require them to pay the IRS more money. A failure to report income could lead to charges for tax evasion or fraud.

Examining Evidence of Donations to Charitable Organizations

The IRS recommends keeping all documentation for charitable donations, and the individual must keep a record when they file their taxes. If they don’t have a receipt showing the exact dollar amount, it may be a bad idea to claim the donation. The IRS will want to see the receipt if they perform an audit. If these records aren’t readily available, the individual could get into some serious trouble with the federal agency.

Using Common Sense with Business Expenses

Self-employed individuals must consider what is and what a business expense isn’t. For example, if they have a staff and they provide kitchen supplies for the workers, the taxpayer can claim the items as an expense. But they cannot claim kitchen supplies they use for their family. If they purchase clothing for business-related events, they can add these costs to their business expenses, but they cannot deduct attire they buy for personal use. The IRS will flag them for suspicious activities if they see excessive costs for business expenses that aren’t related to the business.

Deducting an Office Space

Deductions for an office space present issues for self-employed individuals who work from home. Typically, the rules apply to a specific room of the home that is created for a home office that is used for business only. The taxpayer cannot deduct their living room as a business deduction, even if they work from their living room. The room isn’t used for business only, therefore; it isn’t tax deductible. Before considering a deduction for an at-home office space, the individual must consult a tax preparer or tax attorney. It’s better to be safe than face an audit or criminal charges later.

Tax Liens and Collections

Taxpayers who receive a tax lien often could raise red flags for the IRS, and if they don’t submit their payments to the IRS, this could lead to an audit. Individuals who don’t manage their tax payments and try to evade their tax responsibilities could face an audit. The IRS will want to review all the taxpayers’ tax documents and receipts. If there are any discrepancies, the individual could face serious tax evasion or fraud charges. Typically, if the individual doesn’t submit their payments, the IRS places a lien against their tax refund. If the tax refund doesn’t cover the full balance, the IRS could seize other monetary assets. This could include the balance of their checking or savings accounts.

Managing Back Taxes

Any taxpayers who cannot pay their current tax payments must contact the IRS directly and set up a payment plan. Do not wait until several months after filing. Typically, the individual has until December 31st to pay the taxes they owe, or the IRS issues a tax lien. If they owe money from previous years, the taxpayer needs to set up a payment plan, or they could face serious penalties or repercussions.

They conduct a tax audit when the IRS sees suspicious activity on a taxpayer’s documents. The IRS also initiates an audit randomly just to determine if the taxpayers are fulfilling their obligations to the state and federal government. The assessment requires the taxpayer to provide all their tax forms and documents to the IRS agent assigned to their case. The agent reviews all documents and recalculates the entire tax form to ensure that the figures are correct. Discrepancies could lead to higher tax payments and possible fraud charges. Reviewing tax laws and audit procedures helps the individual to avoid serious penalties.