Suggestions for Avoiding a Tax Audit
Suggestions for Avoiding a Tax Audit
It’s no secret that nobody likes paying income taxes and of course, no one likes to get audited. While the vast majority of the tens of millions of income tax returns that get filed every year are processed by the IRS without issue, on occasion, the system will mark a particular return for an audit. This involves meeting with an IRS agent and discussing the details of that particular tax return. While there is no published list of things that might trigger an audit, and many of them are simply selected randomly as part of the way the IRS operates, there are a few things that can trigger an audit and you should be careful when filing your return to avoid some of the traps listed below.
Income levels – We all want to earn a lot of money, as having a lot of money simply makes life easier than being poor. On the other hand, those taxpayers with high incomes are simply more likely to be audited than those with lower income levels. There are several reasons for this; high earners are more likely to be itemizing deductions and some of those can invite scrutiny.
In addition, since high earners are also more likely to be paying higher taxes, they’re more motivated to find ways, legal or not, to lower their taxable income. There isn’t anything wrong with earning a lot of money and no one discourages that. Still, those who earn higher incomes are going more likely, on average, to be audited than those at the lower end of the income scale.
Unreported or underreported income – The IRS expects you to report your income accurately, and your taxes are based on that. Some types of earnings, such as those generated by sales of stock or work as an independent contractor, will require that a 1099 form be submitted by both the taxpayer and the organization responsible for the payment. If the IRS receives 1099 from the paying entity but not from the taxpayer, that could trigger an audit. Sometimes this is due to oversight and sometimes to malfeasance, but failure to report all of your income, particularly if there’s the documentation for it, is likely to result in an audit.
Old-fashioned mistakes – Happens. It could be something as simple as mistyping your Social Security number or entering information on the wrong line of the form, or it could be something more complicated, such as failure to include an additional required form. Regardless, major errors of any kind are likely to result in having your return examined manually, and that could lead to a call for an audit from the IRS.
Inappropriate deductions – You are, of course, permitted by law to take certain deductions from your gross earnings. Things such as dependent child deductions and mortgage interest deductions are quite common and don’t generally arouse suspicion…unless they’re out of line with your income. If you’re earning the minimum wage and you’re taking deductions on a $2 million mortgage, that’s likely to arouse suspicion. Similarly, if you’re earning an average salary but taking charitable deductions of tens of thousands of dollars, for example, that, too, will likely invite scrutiny. The IRS is fine with people taking deductions; millions of people do it. But those that are out of line with the taxpayer’s income are going to be examined a bit more closely than those that are more typical.
Cash-based businesses – Certain types of businesses are likely to invite scrutiny, particularly those that involve cash. Cash-based businesses often make it easy for their owners to hide income from the IRS. This might include running a coin-operated car wash, or a game arcade, or just about any other business where you’re paid in cash.
Earned Income Credit – Those who claim the Earned Income Credit can also attract attention, as filers can sometimes get back more than they earned with that credit. While it’s not common to get audited for this, those to do file for the EIC do have their returns examined a bit more closely than those who don’t.
Gambling losses – you are permitted to deduct gambling losses, but only to the extent of your winnings. Losses that are not accompanied by winnings aren’t deductible. Your winnings, of course, must be reported as income, and if you win more than $1199 at once, that will likely be reported for you by the casino or whatever another gambling organization is responsible for paying you. The bottom line – you can’t claim a net gambling loss for the year.
Round numbers – This may sound odd, but round numbers do attract attention from the IRS. Why? Because while round numbers do occasionally occur in business and financial transactions, they’re not overly common, and too many round numbers on a tax return might suggest that you’re simply making things up. Charitable deductions of $757.35 just look more “natural” to the IRS computers than $750.
There are lots of reasons that one might get audited by the IRS and some of them are going to be just routine mistakes. Others are going to be the result of being randomly selected for an audit even though there’s nothing specific on the return that may look suspicious. Other things are common triggers that the IRS sees every day and which always arouse suspicion. In the end, it works out to this – the IRS expects taxpayers to fill out their tax returns honestly and to report income and related data as truthfully as possible. If you’ve got something unusual on your return, it’s OK, provided that you can either justify it or back it up with documentation. If that’s the case, even if you’re audited, they’re just likely to tell you that it’s OK. What you don’t want to do is make things up, fail to report vital information, or make common mistakes. As long as you’re honest and provide the necessary documentation, you’re unlikely to get audited.
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