No one wants to receive a letter from the IRS or the Arizona Department of Revenue (ADOR). The word “audit” can instantly trigger feelings of anxiety and fear. For many in Prescott and the surrounding Arizona communities, this can feel like an overwhelming situation. 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 Arizona 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 and ADOR 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.
- 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
Simple errors like a transposed digit, incorrect Social Security number, or a miscalculated deduction can draw the attention of the IRS. In Arizona, the ADOR also conducts audits, often looking for mathematical errors, non-payment of taxes, or disputes over deductions and residency. For example, if you are a seasonal resident, the ADOR may want to verify your residency status to ensure you are not underreporting your Arizona-sourced income. If you receive a notice from the ADOR, it’s crucial to respond to their request for information within 30 days to avoid a Notice of Proposed Assessment with added penalties and interest.
- 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 residency status. 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.
Patti ONeill and the team at ONeill Tax Resolution are dedicated to helping individuals and businesses in the greater Prescott area and across Arizona. They can help you with your IRS and ADOR tax problems, including audits, back taxes, and more.
Don’t let tax anxiety control your life. Contact ONeill Tax Resolution today for a consultation and get a clear plan to resolve your tax issues.
