Each 1099 form includes the employer identification number (EIN) of the payer and the Social Security (or taxpayer identification) number of the beneficiary. The IRS compares almost every 1099 form with the beneficiary's tax return. You just learned about the 9 main triggers for IRS audits. The IRS receives a copy of every W-2 form it receives.
When you file your tax return, the amount you declare on your tax return is compared to each of those listed in the IRS database. You are never audited by surprise. The IRS must send you a notice by mail informing you that you are being audited. The IRS receives copies of every Form 1099 and W-2 you receive, so be sure to declare all of the required income on your return.
IRS computers are very good at matching forms with the income that appears on your return. A discrepancy sends a red flag and causes IRS computers to publish an invoice that the IRS will send to you by mail (these letters do not count as audits for the purposes of the IRS's 0.4% audit rate). If you receive a 1099 that shows income that isn't yours or indicates incorrect income, ask the issuer to file a correct form with the IRS. The rules for deduction of alimony are complicated and the IRS knows that some taxpayers who request this cancellation do not meet the requirements.
Some limited partners and members of an LLC who don't file Schedule SE or pay taxes on self-employment are on the IRS radar. Because the IRS receives these tax documents early in the calendar year, it can use its matching system more efficiently to compare your reported income with what your customers claim to have paid you. The IRS is looking for taxpayers who, year after year, declare large losses for activities that seem to be fun to their hobby to help offset other income, such as salaries or profits from businesses or investments. You can choose to have the credit paid in advance directly to the health insurance company directly to reduce your monthly payments.
Between applying for a tax extension, making contributions to an IRA or HSA, and meeting other tax deadlines, today there is much more to do than simply file your federal income tax return. But it's also a gold mine for IRS agents, who know from experience that self-employed workers sometimes request excessive deductions and don't report all of their income. It also wants to ensure that both the payer and the recipient have correctly declared alimony in their respective returns. The IRS expects most people to use their personal car for business trips, as it's not always financially feasible to have a standalone vehicle for business.
Math errors can also attract the attention of the IRS, but they usually don't lead to a full exam. Assuming a large loss from the sale of rental properties or other investments may also arouse the curiosity of the IRS. In the end, there's no sure way to predict an IRS audit, but these 23 red flags could certainly increase your chances of attracting unwanted attention from the IRS. The IRS wants to ensure that owners of traditional IRAs and participants in 401 (k) plans and other work-related retirement plans properly declare and pay taxes on distributions.
If you have donated a conservation or front easement to a charity, or if you invest in a company, an LLC or a trust that made that donation, you will most likely hear from the IRS.