The Inland Revenue Service (IRS) most likely knows about most of the financial accounts that are possessed by an individual. Regardless of the information that the IRS possesses about different individuals, they rarely inspect deeper into the bank and other financial accounts. The only time they do this is when the accounts are being audited. Does this imply that the financial accounts are audited by the taxpayers?
Well, the short answer to this is yes. Yes, the IRS can audit bank accounts and any other financial accounts that are possessed by individuals.
IRS has a substantial volume of information pertaining to its taxpayers. The main source of information that the taxpayers have comes from three different sources. These sources are as follows:
- Filed Tax Returns by an individual
- Information Systems pertaining to an individual
- Data procured from third parties, like Social Security Administration
IRS Audit of Bank and VENMO Accounts
IRS mostly notifies organizations and individuals of audits using mailed letters. Once these letters are duly received, they require quick and precise action by the banks. It is also important to ensure that the IRS audited is properly conducted and the individuals, as well as companies fully cooperate with IRS to execute the audit in a smooth fashion.
It is important to note the fact that the IRS requires all banks to report their annual cash flows of everyday bank holders. This is then compared with statements against the tax returns. Furthermore, IRS also needs to look into all accounts that make more than $600 and subsequently make more than $600 worth of transactions too. In this aspect, it is also important to note the fact that the eventual goal of the IRS audit is to find out who uses personal checking accounts in order to avoid paying tax amounts in full. Therefore, these are the basics that are used by the IRS to initiate an audit.
This implies that the audit is not surfaced out of thin air. In fact, it is only conducted after a holistic approach is adopted by individuals pertaining to bank and VENMO accounts. Hence, from the perspective of individuals and companies, it is important to note the fact that there should be proper disclosure related to all the financial accounts possessed by an individual so that the room for suspicion and error is minimized to a maximum.
Previously, personal checking accounts were not investigated or audited by the IRS. The main rationale behind IRS now conducting bank audits of bank accounts, and VENMO accounts primarily lie in the realms of finding out the people who avoid paying full tax amounts. These individuals are then investigated, and their accounts are duly audited so that they can be taxed accordingly.
Reasons behind an IRS Audit of the Bank Account, and the VENMO Account
There are several different reasons behind IRS auditing thousands of accounts on an annual basis. These reasons are as follows:
- Mathematical errors in financial reporting: It is a common mistake undertaken by numerous different tax payers, that they do not always report numbers accurately, to the T. Any mathematical error in the reported financial data often provokes the IRS since it creates room for suspicion pertaining to fraudulent activities. Therefore, it is imperative for individuals to double check all the transactions before making that final move.
- Failure to Report Income: Since all accounts are technically interconnected with each other, it is of primitive importance to ensure that all income sources, regardless of their tax deductibility or rebate status are fully incorporated in the bank account itself. It is important to consider that failure to report any income might result in several issues, which eventually lead to audit of the financial statements.
- Excessive charitable donations: Given the fact that contributions to charity are subject to tax deductions, it is important to note the fact that charitable donations should only be reported when they actually occur. Individuals are not supposed to claim charitable donations unless there is concrete evidence that the charity has actually been paid for. In the case where there is no concrete evidence pertaining to charitable donations, it is important to understand that any false donations should not be accounted for. Otherwise, it might result in an audit of all the financial transactions involved.
- Excessive Loss Reporting on Schedule C: Normally, in the case of self-employed individuals, there is a temptation to club personal expenses with business expenses. Reporting such losses on a continual and a regular basis might result in an increased act of suspicion on the part of IRS, and hence, can provoke them to conduct a full-fledged audit.
- Excessive Business Expenses: In quest of reporting higher incomes, it is a common practice by businesses to report higher than actual expenses. This, in return, reduces the profitable income of the company, eventually resulting in lower profits, and hence, lower tax amounts.
- Claiming home office deductions: Home Office deductions mostly qualify for rebates and deductions from the personal income tax scheme. However, it must be noted that in certain cases, home office deductions that are included by individuals don’t often qualify. Hence, in the case where home office deductions are unreasonably claimed, it often results in IRS probing further into the accounts, and claiming office deductions.
What to do in case an audit is initiated in bank accounts?
There are certain dos and don’ts that should be accounted for in case a bank account is audited. In this regard, individuals need to take care of a number of things. These things are as follows:
- Relax, and DON’T panic: IRS audit frequency is not that substantial. In the case where IRS audits on a continual basis, it is important to note that in the case where an individual has done nothing wrong consciously, there is nothing to be afraid of. First things first, it is important to contact your lawyer, and then figure out the next steps depending on what the IRS Audit Letter says.
- Figure out what went wrong: IRS does not audit at random. There has to be something to provoke them to an extent that they would audit the bank account, as well as the VENMO account. It is generally good practice to keep a record of receipts and statements, to make sure that all the relevant information and records are at hand.
- Do not hide, and do not cover up: Once the audit has been initiated, the smartest move is to cooperate. A lot of individuals make the mistake of dodging IRS, and trying to get away with the audit using delaying tactics. Rest assured, this does not work. In fact, it forms a basis for them to create more of a red flag, and that is even more detrimental to the cause.
