The IRS is notorious for targeting businesses that deal in cash, so reporting all of your sources of income on Form 1040 is important. For example, if you’re a pianist or give piano lessons, you’re not likely to be audited unless your income dramatically increases or decreases over the year. But even if your business income is small, you should justify your expenses. If possible, keep all of your receipts and clearly indicate what business-related expenses they were for.
In case you do get audited by the IRS, don’t panic. Audits aren’t inevitable, and the IRS has programs that check math on tax returns and flag those that don’t add up. So be honest and modest – and be sure to document all deductions and donations! If your income does change, document the reason so that the IRS can confirm whether you’re reporting your income accurately.
An audit by the IRS is very rare, with only one in every 143 returns being audited in a given year. While some audits are random, the vast majority are triggered by a taxpayer’s actions. Knowing the IRS red flags can help you avoid a tax audit. Overvaluing home office expenses, donating donated goods, and failing to sign your tax return are all common activities that can trigger an audit.
When it comes to the risk of audit, the IRS is stepping up its scrutiny of high-income earners. For example, the rate of audits for those earning more than $200,000 jumped to 4% for those earning over $5 million, and it reached 21% for individuals earning $10 million or more. Furthermore, the IRS is placing more scrutiny on foreign assets and businesses with offshore accounts. Those who fail to disclose these assets are more likely to be audited, and this has resulted in a voluntary disclosure program to make it easy for such people.