It is always a good idea to revisit why individuals get audited. Generally, the IRS can audit returns filed in the past three years. The penalties that result from an audit can be severe. It can be as much as 20 percent of the amount of an “erroneous claim.”
If the IRS decides a return is frivolous and doesn’t contain enough information to assess whether it’s accurate, a taxpayer may face a penalty of $5,000. Also, just as a reminder, taxpayers can face criminal charges if the IRS feels you are guilty of tax evasion or fraud.
Why audits happen
The fact that we may be seeing less audits than in the past does not mean there is little chance of an audit occurring. Items that may trigger an audit include:
- Taking deductions that are out of proportion to one’s income. The IRS looks at a large number of returns. When they see deductions that seem unusually high for the amount of money you are making, the chances of an audit dramatically increase. Make sure you keep records and receipts when taking deductions.
- Hobby losses. The IRS distinguishes between hobbies and business. When deductions from hobby exceed the income made from that particular hobby, you are alerting the IRS to potential issues.
- Taking early withdrawals from retirement accounts. When not qualifying for exceptions concerning an early withdrawal, you are facing a ten percent penalty. When considering whether to report such withdrawals, remember that the IRS has means of tracking such withdrawals.
- Extensive business expense deductions. If you are taking more deductions this year than last year, the IRS will pay attention.
What should you do?
Michigan taxpayers need to fill out their tax forms carefully. Often a tax audit is the result of a simple mistake you make on your returns. But there are circumstances where the IRS may randomly compare returns to discover anything unusual.
It is useful to seek the advice of knowledgeable tax lawyers regarding the types of behaviors that will bring you to the attention of IRS officers. But audits may arise even when you take care. This could mean you will need representation.