There is no foolproof way to avoid being audited. The IRS makes most of its selections either because the filer is part of a targeted group or because a computer program picked out the tax return.
However, even though many of the returns are chosen randomly, certain red flags make a return more likely to be audited. If you do not want the IRS knocking on your door, avoid these red flags:
1. Arithmetic errors: If you make an addition or subtraction error, you will hear about it. This usually does not result in a full-blown audit but check your math before filing your return.
If you do get a letter from the IRS about your perceived mistake, double-check. Sometimes a number was read or keyed incorrectly.
2. Mismatched numbers: For example, if the numbers on your 1099 form do not match the entries on your return, the IRS will notify you. Double-check to be sure the error was yours, not theirs. IRS employees have been known to err.
3. You get most of your income in cash: The IRS will be looking for unreported income and will scrutinize any cash deposits made to your accounts. If those deposits are not being reported as income, you had better be able to explain it. Self-employed and small business owners are particularly targeted.
Keep excellent records, especially about your deposits.
4. You talk too much: If you are ever foolish enough to try to pull a fast one on the IRS, keep your mouth closed. You would be surprised how many neighbors, friends, and even family members report what they have heard.
Remember, the IRS gives 15-30% of the additional tax collected to the whistle-blower!
There is even a form, Form 211, to report those not paying their taxes properly. Many serious crimes are solved because the perpetrator told someone what they did.
5. You are out of the ordinary: When your deductions are considerably greater than others at your income level, the computer will flag you.
Keep in mind that the IRS does not have unlimited time and resources. They target the returns likely to result in the biggest collections. Do not pay more tax than you must, but don’t go too far and cross the line in your deductions.
This can even include things like charitable donations. It looks odd to the IRS if you claim you are giving 50% of your income to charity. They are going to take a closer look at everything on your return. That does not mean you can’t give 50% of your income away – it simply means that everything else will be scrutinized.
6. Your tax preparer is questionable: Not all tax preparers are created equal. Some simply are not very good. Others are intentionally breaking the law. They may promise a large refund and then claim false deductions on your return. While you are not entirely at fault, the IRS will also come after you.
Being audited is never a positive experience. On the other hand, if you act in good faith, it’s unlikely that anything bad will happen beyond an increase in your tax bill.
The tax code is complicated – everyone knows that, even the IRS. Be honest, and you have little to fear. However, keep these red flags in mind before filing your tax return!
- Team SAG