If you have already filed your taxes for this year, you do not need to panic as none of the following applies to your tax return. But if you have not filed your taxes for this year, you still have time to make sure you minimize your chances to be chosen for an audit by the IRS.
Receiving a notice of audit from the Internal Revenue Service has the tendency of setting people’s nerves on edge. You get thoughts of being thrown in the poorhouse because of unpaid taxes or thrown in jail because the IRS thinks you lied. This is not want anyone could ever wish for.
Most of these reasons can be avoided by hiring a professional tax preparer or being very meticulous if you do your own taxes.
If you are found wanting by the IRS, you may get audited on the following grounds:
- Data Entry Errors
The act of transferring information from place to place exposes you to the risk of transposing numbers, entering data incorrectly, and other errors. Other errors could occur because due to miscalculations.
An audit can be triggered by something as trivial as entering your social security number wrongly or misspelling your own name. Making math errors is another trigger.
Filing electronically can help to get rid of some of these issues. E-filing allows you to load important information directly from your W-2 and past tax returns and restraining manual entry. E-filing calculators can also aid you with addition and subtraction errors and other mathematical mistakes.
If you file a paper return, carefully scrutinize everything even if you used a tax preparation service.
- Unreported Income
It can be really tempting just to omit a few dollars from your total and lessen your taxable income but beware. The IRS gets copies of the same income reporting forms you do, from copies of your W-2 to Form 1099. It also receives information about alimony, K1 income, and foreign bank accounts, so leaving the income from your side-hustle off your tax return isn’t a good idea.
Not only that, but the IRS compares your income from year to year. Once any form of discrepancy is noticed without any supporting information to show why there is such a difference can make the government sit up and take notice.
Omitting wages, self-employment income, bonuses, and other income contributes to your audit risk. Be truthful to a fault and report every of your income on your return.
- Overstating Deductions or Disproportionately High Deductions
Charitable deductions, business expenses, and home office deductions can be red flags for the IRS, especially if they are out of ratio to your income or last year’s return.
Donating to charity is a good thing. Don’t tarnish it by falsifying how much you gave to a local church or the amount you claim for donating items like clothes, cars, and appliances. If you make a huge donation, always get a receipt and submit it as evidence along with your return.
Ensure that your business expenses make sense and are correct. If you have large expenses, keep receipts in case you are asked to verify they are genuine. Claiming a home office may lead to an audit as well, although the rules governing home office deductions have been simplified and clarified over the past few years.
And, just like they receive your income forms, the IRS gets copies of your mortgage interest, so if you claim it, make sure it corresponds what your mortgage broker says.
- Wrong Filing Status
It can be a little tasking to determine the correct filing status, especially when you are married and one spouse either does not work or is self-employed. A reputable tax expert should be able to put you through in making the property choice.
Changing your filing status all of a sudden can also create notice. For example, if you are recently divorced and file as single or head of household rather than married filing jointly, the IRS may decide to get up in your business to find out what’s going on.
- Claiming Non-Existent Dependents
Falsifying claims to children you don’t have or claiming pets as children seem to be a conventional scam to try to minimize your taxes. Or it may be a sincere mistake – split households may claim dependent children on both returns even though they no longer file jointly. Child custody can create a lot of misunderstandings.
Carefully follow the IRS guidelines for deciding whether or not someone is your dependent and don’t falsify any part of it. The IRS will discover, and you will get audited. They have the very exact set of skills to know when you are padding your return.
- Claiming Earned Income Credit
The Earned Income Tax Credit (EITC) is intended for those with very low incomes. It is bound by numerous but explicit rules about when it can be claimed, and the IRS is working hard in ensuring only those who qualify receive the credit.
If you have over $3,500 in investment income or over $15,270 (the lowest EITC – for those not claiming a qualifying child), you are not eligible for the credit and claiming it, even in error, can flag your return for audit.
- Self-Employment
Unfortunately, the IRS tends to examine those who are self-employed, especially if you fail to report a profit for at least three out of five years. If you are not making a gain with your sole proprietor business, the IRS figures you are using the status to dodge your tax. Businesses with excessive losses may be deemed a hobby instead of a company, and the deductions will be disapproved.
- Disagreement between Individual Taxpayer and Corporate Filing Associated with Taxpayer
If you are a shareholder in a corporation, the IRS may compare your tax return to the one filed by the corporation to be sure the filings are steady. Bear in mind, corporations are not essentially large enterprises. If you are a shareholder in a business that has been incorporated, especially as a C-Corporation, the numbers on your personal tax return should match the corporate filing. If there is a difference, the IRS may come for you.
Tax audits are not in any way interesting. Even if you are certain everything is correct and you have necessary document to support everything on your return, just the bother of going through an IRS audit causes a panic until it’s over.
You may not be able to stay away from an audit, depending on your circumstances, but if you are cautious in completing your return each year, your chances of an audit will be minimal.