IRS may double check your tax return filings personally or through the mail. An IRS audit may pose some challenging questions related to your income tax filing. IRS does not call for an audit of all the returns filed. They set some triggers and marks that may require some additional information or clarification. Whether intentional or unintentional, you may have to face an IRS audit if your tax filings are found to be incorrect.
Even if you file the tax returns through a tax agent, you may still be held liable for some errors or mistakes. There are many reasons IRS can call on you for an audit. The income-related mistakes are some of the most common reasons triggering an IRS audit.
Did You Report All The Income Earned?
IRS will closely examine all of the W1099s and W2s that relate to your income. Report all of your income including any rental, passive income or dividends on your 1040 form. Failing to report all sources of income is one of the biggest reasons that call for an audit.
Your employer and other sources of income also send copies of their forms. For example, your employer will send a W2 to the IRS showing your income. The IRS DIF system scans and matches these figures against your tax filings. A mismatch of the portion of income or total income can land you in trouble.
Most people fail to use the 1099-misc. form that enables them to report miscellaneous secondary sources of income. Also, keep in mind, most of your income already gets reported to the IRS. If any of your income sources are missing, or shows inaccurate earnings, it will land you in trouble.
Don’t blame the mathematical errors, missing a zero on $40,000 doesn’t equate to earnings of $4,000 per annum. IRS uses a Discriminant Information Function that scans all of the tax returns filed. An intentional mathematical error may also get you a call for an explanation.
Your Income Slab is too High or too Low
If you report no income at all, you may still not get away with it, if you actually are an earner. It doesn’t matter whether you spend all of that, or make hefty investments. If your total income falls under $25,000 or above $500,000, the chances for your IRS audit increase.
Showing an income too low without mentioning all the income resources triggers an immediate red flag. An annual income that’s too high also needs the backing of income source declaration and correct tax filings. Remember, IRS has most of the taxable income data in the US, which puts them in a commanding position to assess the average annual income against different primary sources of earnings.
Mistakes on Adjusted Gross Income
Adjusted Gross Income or AGI is calculated from your net gross income. Once you report all of your earnings and income sources on form 1040, you may deduct qualifying expenses.
Which expenses qualify for your tax deductions? Whether you calculate the right amount and apportion correctly or not?
It’s important to differentiate between the net income, gross income and the adjusted gross income. Before you deduct for charitable or other standard deductions, adjust the gross income figures.
If you’ve passed the first two marks above with reporting all of the income sources correctly, it’s now time to carefully calculate the AGI.
Some of the allowed and qualifying tax deductions include:
Educator expenses such as school supplies
Moving expenses for the members of armed forces
Tuition fees and student loan interest
Penalty on early withdrawal of savings
Deductions from self-employment expenses (apportioned)
Deductible part of self-employed taxes
IRS provides additional columns on reporting additional income and additional deductions. Your AGI is different from the take-home or net income. Adjusted gross income can only be calculated properly if you report all sources of income. Carefully, evaluate the qualified deductions too. For example, your portion of the house that you use for office work may qualify for apportioned rental or maintenance expense deductions.
A Quick Wrap-Up
Calculating annual income may seem straightforward, but it isn’t always. Especially with uneven income and multiple temporary income sources. You may have done a short employment contract for a month or so, and forgot to report it in your gross income. Reporting all and correct annual income with the right deductions can save you a lot of time and trouble.
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