Facing a tax audit is a stressful experience, whether you’re in Grafton or anywhere in North Dakota. The thought of receiving a letter from the IRS or the North Dakota Office of State Tax Commissioner can feel overwhelming. Fortunately, understanding the most common red flags can help you steer clear of trouble and give you peace of mind.
At 701 Tax Resolution, owner Nikole Nelson, an Enrolled Agent, is a federally licensed tax practitioner with unlimited rights to represent taxpayers before the IRS. Her team provides expert tax resolution services to individuals and businesses across North Dakota. Here are five common reasons taxpayers 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 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’s computer system uses 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.
- 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 regularlyas 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
Simple errors like a transposed digit, incorrect Social Security number, or a miscalculated deduction can draw the attention of the IRS. In North Dakota, the Office of State Tax Commissioner actively conducts audits, with a particular focus on sales and use tax for businesses and residency issues for individuals. The Tax Commissioner’s office will often send a “voluntary” questionnaire that, if not handled properly, can escalate to a full audit.
- How to Avoid It:Use tax software or a professional service to file your returns. Double-check all of your information, from your Social Security number to your bank account details. If you receive a notice, do not ignore it.
Need Help? Don’t Wait Until It’s Too Late
If you’re already facing an audit or dealing with tax issues, the best thing you can do is take action now. 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.
Nikole Nelson, Enrolled Agent, and the team at 701 Tax Resolutionare dedicated to helping individuals and businesses in North Dakota. They are well-versed in both federal and state tax laws and are ready to help you resolve your tax problems and secure your financial future.
Don’t let tax anxiety control your life. Contact 701 Tax Resolutiontoday for a consultation and get a clear plan to resolve your tax issues.
