An IRS letter that asks for supporting documentation is simply an attempt to review your accounts and documents to ensure you’re reporting things correctly. The IRS assessment is not set in stone. In other words, you have the option to agree or disagree with IRS. If you agree, simply follow the instruction in the letter on the next steps. If you disagree, we can help look at your supporting documents and form a response.
Some things can trigger an IRS audit more frequently than others, such as:
- Forgetting to report an income. The IRS gets a copy of every tax form you receive, so failure to report an income will cause a discrepancy, and most likely, an IRS audit. Be sure to organize your tax documents to avoid this issue. Some issuers don’t send you the physical forms, but rather send you links to download or messages to check your virtual account mailboxes. Be sure to check your email(s) as well.
- Error in tax preparation. We once helped a client resolve an IRS audit, in which the IRS billed her ten thousand dollars plus interest. We later discovered that the federal tax withheld was overstated by exactly ten thousand dollars, prompting the IRS to bill her that amount that was not paid yet. It was a simple issue of typing too fast!
- Multiple loss-years. Hobby income could be in this category, as well as businesses that incur losses for consecutive years. Typically, the IRS wants to see proof of business expenses.
- Expenses that are well-rounded. For example, business travel expenses that are exactly $5,000. While it is possible to arrive at this pretty number, the chances of that are pretty slim, especially coupled with other well-rounded number expenses. There’s a high probability that the IRS would want to see documentation of those expenses.
- Claiming Education Expenses Credit (like American Opportunity Credit or Lifetime Learning Credit). Taxpayers claiming educational credit get audited randomly by the IRS. You must have enough supporting documents to convince IRS to let you take the credit.
- Claiming Earned Income and Child Tax Credit. Very similar to number 5 above, you must have enough supporting documents to prove that you can take this credit.
- Claiming 100% business vehicle expense. Let’s face it: if you’re self-employed with only one vehicle, there’s almost no way you’d use your vehicle for business purpose only. Claiming 100% business vehicle expense is very tough to prove, and you must have tidy log records to support your claim.
- Claiming large itemized deductions. The IRS would typically want to see proof of most large expenses, so it’s an excellent idea to always keep your documents in check.
- Engaging in virtual currency transactions. This is a hot area that is checked frequently. The IRS wants to make sure taxpayers pay their due with cryptocurrency transactions. Make sure to keep your logs organized.
- Withdrawing from your retirement accounts. Some retirement account withdrawals are not taxable, so the easiest way is to show the IRS that the taxable box is not checked in your 1099-R form. If you’re over the age of 59.5, you should be able to withdraw from your retirement account without incurring the 10% early withdrawal penalty. That makes us think that turning 59.5 is better than turning 21.
The list above is by no means an exhaustive list. Our world is constantly changing and evolving, and there will be other new things happening. We are always here for you to resolve your individual tax matters.
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