No one wants to receive a letter from the IRS or the New Jersey Division of Taxation. The word “audit” can instantly trigger feelings of anxiety and fear. For those in Haddonfield, Moorestown, or anywhere in South Jersey, this can feel like an overwhelming situation, especially when high-dollar tax issues are involved. Fortunately, understanding the most common red flags can help you steer clear of trouble and give you peace of mind.
Here are five common reasons taxpayers in the Philadelphia metro area get audited, and what you can do to avoid them.
1. Mismatched Income Reporting
This is the most frequent reason for an audit, and it’s an easy one for the IRS and state tax agencies to catch. The IRS receives copies of every W-2, 1099, and 1099-K that you do. If the income reported on your tax return doesn’t match what the government has on file, their computer systems will automatically flag your return.
- How to Avoid It: Wait until you have received all of your income forms before you file your return. Make sure every form is accounted for and that the income you report matches the information provided by third parties.
2. Excessive Deductions for Your Income
The IRS and state tax agencies use a special formula to compare your deductions to those of other taxpayers in your income bracket. If your itemized deductions—such as charitable contributions, medical expenses, or mileage—are unusually high compared to the average, it could raise a red flag. This is an especially common issue for high-net-worth individuals and business owners.
- How to Avoid It: While you should always claim all the deductions you are entitled to, ensure that every deduction is legitimate and that you have all the necessary documentation to back it up.
3. Consistently Reporting Business Losses
If you are a small business owner or self-employed individual and report a loss on your Schedule C year after year, the IRS may begin to suspect that your business is actually a hobby. The IRS has specific rules about what qualifies as a legitimate business and is always on the lookout for “hobby losses” being used to reduce a taxpayer’s overall income.
- How to Avoid It: Maintain detailed records to prove that your intent is to make a profit. This includes separating business and personal finances, having a business plan, and keeping a detailed log of expenses.
4. Claiming the Home Office Deduction
The home office deduction is a major red flag for the IRS, and they tend to scrutinize it heavily. To qualify, a space must be used exclusively and regularly as your principal place of business. Using a dining room table for work, for example, is not sufficient.
- How to Avoid It: Before claiming this deduction, ensure you meet the strict criteria. If you do, be prepared to provide photos, floor plans, and a log to prove the space is used exclusively for business.
5. Making Mistakes on Your Return or Failing to File
Simple errors like a transposed digit, incorrect Social Security number, or a miscalculated deduction can draw the attention of the IRS. In New Jersey, the Division of Taxation is especially aggressive with audits of cash-based businesses and will use methods like a “markup audit” to extrapolate your gross receipts if your records are poor, which can lead to a devastating tax bill. For high-debt taxpayers, another serious issue is simply not filing a return, as this leaves the statute of limitations open indefinitely, allowing the state to pursue you for a tax bill at any time.
- How to Avoid It: Use tax software or a professional service to file your returns. Double-check all of your information, and never ignore a tax notice.
Facing a High-Stakes Audit? Don’t Go It Alone. Get Legal Protection.
If you are already facing an audit or dealing with complex, high-dollar tax issues, the best thing you can do is get professional legal help. Ignoring the problem will only result in increased penalties, interest, and aggressive collection actions like wage garnishments or bank levies from both federal and state tax agencies.
As a tax law firm, McCauley Law Offices is dedicated to providing comprehensive legal solutions for individuals and businesses with serious tax problems. Their tax attorneys can represent you before the IRS and other state tax agencies and work toward a favorable resolution. This legal representation is critical when significant debt is involved, as it provides a higher level of protection throughout the process.
Don’t let a serious tax problem control your life. Contact McCauley Law Offices in Haddonfield today to discuss your tax issues with an attorney who can fight for you.
