When it comes to taxes, one of the most dreaded outcomes is an IRS audit. Nobody wants to be audited, and the prospect of dealing with the IRS can be very intimidating. So what are the chances of being audited? And what can tax preparers do to reduce their chances of being audited by the IRS?
Who Gets Audited by the IRS the Most?
Generally, the more complex your taxes are, the higher the chance of an audit. Self-employed individuals, such as freelancers and small business owners, typically have a higher risk of an audit than those with a more straightforward tax situation. Additionally, those with higher incomes, especially those earning over $200,000, tend to have a higher risk of being audited.
What Are the Chances of Being Audited?
An IRS audit is a thorough review of a taxpayer’s financial information conducted by the Internal Revenue Service (IRS). During an IRS audit, the IRS will examine a taxpayer’s records and documentation to determine whether they have reported their income and deductions accurately. It is important for taxpayers to understand the different factors that can contribute to their chances of getting audited.
The IRS may audit a taxpayer for various reasons, including discrepancies in the information reported on their tax return, suspicious activity, or random selection. The IRS also has a few “red flags” that they use to determine which taxpayers are more likely to be audited. Some of the most common red flags include claiming large business losses, claiming high deductions, filing multiple amended returns, and not reporting all income.
In addition to the red flags, the IRS also uses a computerized scoring system to determine which taxpayers are more likely to be audited. This system takes into account factors such as income level, deductions, and past filing history. The higher the score, the more likely a taxpayer is to be audited. Additionally, if a taxpayer reports a large amount of income or has high deductions or credits, they are more likely to be audited.
The IRS also looks for taxpayers who fail to file their taxes on time or file an incomplete or inaccurate tax return. Taxpayers who fail to file their taxes on time will likely be charged a fine and may also be audited. Furthermore, taxpayers who claim deductions or credits that are not allowed may also be audited.
Finally, taxpayers who belong to certain professions or who have foreign financial accounts may be more likely to get audited. For example, the IRS may be more likely to audit taxpayers who are in the medical or legal professions as they typically have higher incomes and more complex tax situations. Similarly, the IRS is more likely to audit taxpayers who have foreign financial accounts, as they are more likely to use these accounts to avoid paying taxes.
What Can You Do to Reduce the Chances of Being Audited?
Fortunately, there are steps that tax preparers can take to reduce their client’s chances of being audited. One of the most important is to ensure that all of their tax documents are accurate and complete. Make sure to double-check all of the numbers and review their tax returns before submitting them. Additionally, if your client is self-employed or has a freelance business, make sure to keep track of all of their business expenses, as these could be potential red flags for the IRS.
Finally, it’s important to remember that the IRS is looking for signs of fraud, so make sure that you’re not exaggerating your client’s deductions or income on their tax returns. This is a surefire way to get your client audited.
Conclusion
Nobody is immune to IRS audits, and you should take steps to reduce their chances of being audited. Even if they are not audited, you should ensure that they are compliant with all applicable laws and regulations. In the case of an audit, they should be prepared to provide all relevant documents and records that the IRS may request. By taking the necessary steps to reduce the chances of a tax audit, tax preparers can remain compliant and protect themselves from potential financial and criminal liability.
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