If you are working with an accountant, it is very likely that you will be offered tax audit insurance in case there will be a need to respond to an inquiry. Tax authorities check tax returns for accuracy which means that if you have made an error or provided misleading information, you can expect a notice from the mail.
Reasons why your tax returns triggered an audit
- Your tax returns contain round numbers which is very unlikely to happen in your investment income, charitable donations and other reported deductions. IRS will suspect that you have simply fabricated the numbers. Exert some time and effort in ensuring the accuracy of your tax returns to minimize your apprehensions.
- Large amounts of deductions that are not associated with the business or line of work can easily raise doubts. Your tax returns can also be subjected to audit if you claim more than 3% of your income went to charitable donations. If you have made donations, make sure to keep the receipts in case IRS asks for supporting documents.
- If you run a small business from home, you can only deduct a portion of the amount paid for home insurance, utilities, mortgage interests and other expenses. Do not deduct the total amount of expenses as it would be disproportionate to the expenses incurred by the business.
- Tax authorities have information on how much income an individual earns from a certain line of work or business. If you report a very small income, IRs may suspect that you have misdeclared your income. If there are significant changes in the income from year to year, IRS will think that you are not reporting the income accurately. IRS uses an automated system to check tax returns and certain entries may trigger an audit.
Having a professional to represent you during a tax audit is not mandatory but it helps a lot when you need assistance. However, professional fees can quickly add up which requires a tax audit insurance for protection from the substantial costs. Audit insurance may not eliminate the problem with IRS but it will at least provide some peace of mind.