Remember when your mother asked you “Who broke…..” and somehow, she knew it was you? Well the IRS operates in the same fashion. When you receive a W-2, 1099, etc. in the mail, so does the IRS. When income figures on your return don’t match what’s on file with the IRS, you will be selected for an audit. Usually these audits are completed internally and the IRS will mail you a detailed explanation of the change in your refund/amount due.
Tax returns that will also raise an eyebrow are returns with itemized deductions, self employed individuals, cash businesses, and small business. Itemized returns are scrutinized due the amount of deductions allowed, which invites the possibility of fraudulent deductions. The same holds true for self employed tax payers. Self employed individuals report income on Schedule C or E. The expenses claimed on a tax return may be scrutinized if a net loss is reported. Cash businesses such a restaurants, laundry mats and bodegas may be audited due to the large number of cash transactions. These types of businesses also have a history of underreporting income because of the difficulty in proving a cash transaction took place. Small businesses are also scrutinized because of the increased risk of accounting errors.
If you are selected by the IRS for an audit, it doesn’t mean that you were cheating on your tax return. You may have been selected at random or worked in an industry that historically receives audits. As long as you correctly reported income, expenses and deductions on your return then you need not worry. If an error is found, you will receive a letter detailing the error and the additional tax you owe. However, there may be a mistake in your favor and along with the letter detailing the mistake, a check will be issued to refund any over payments made. Bottom line, if it’s going to be reported on your tax return, make sure you have the proper documentation (such as receipts and bills) to support your claims and send the IRS the requested documents. Proper documentation will ensure that your audits will be completed quickly and effortlessly.
