Staying on the right side of the IRS
While audits are rare, most Americans would probably like to avoid them altogether. The percentage of people who actually are audited is extremely small, according to the Internal Revenue Service, but the number has risen slowly since 2008. If the IRS does decide to audit you, there is little you may do to stop it. You may, however, reduce the odds that you will be singled out for that extra attention in the first place.
1. Check your figures
One of the most common red flags for auditors – erroneous data entry – is also one of the most preventable. It seems simple enough to follow the advice to “double-check your return,” but surprisingly, people are often too careless regarding their taxes.
In some cases, taxpayers make avoidable mistakes by forgetting about income or related forms they’ve received when filing.
- A good practice is to wait for all your income reports, bank and investment statements and other applicable financial paperwork to arrive before starting your tax return.
- Correctly reporting dependents and exemptions, as well as ensuring that the numbers match, is also important. The IRS’s automated system will easily detect discrepancies, and it won’t be obvious whether or not a discrepancy is accidental or on purpose.
2. Honesty is the best policy
Perhaps it’s common sense, but being 100% truthful on your tax return is an absolute must to reduce the chances of an audit. Realistically and accurately reporting income, deductions, credits and other figures can help keep an audit at bay.
- In general, you should be prepared to look an auditor in the eye and support any number you claimed on your return.
- Self-employed filers, for example, should have receipts for every business deduction they claim.
3. Go vanilla
The largest pool of filers – which consists of individuals or joint filers who earned less than $200,000 but more than the lowest earners – tends to avoid overt scrutiny.
You’re more likely to be audited if you make more than $1 million a year or you’re in a very low income tax bracket. Both categories historically are fertile grounds for fraud and – because of the greater complexity – mistakes in data entry.
- High earners typically take more deductions, such as for charitable contributions, and are more at risk of being audited.
- Taxpayers filing Schedule C are more likely to be questioned.
- If you don’t own a house or have children and you make a modest income, there is virtually no chance you will be audited, unless you’ve made a mistake on your tax return or your deductions are abnormal.
4. Realistic deductions
Unusual or unrealistic itemized deductions, either for individuals or small business owners, may raise a red flag for auditors. For example, claiming a charitable tax deduction for 40% of your total income could raise some eyebrows at the IRS.
If you’re a sole proprietor and you file Schedule C, which details profits and business expenses, reporting losses for three years or more could encourage an auditor to request proof that you’re actually in business.
If you’re itemizing deductions on Schedule A, it pays to know what constitutes a legitimate tax deduction. Daily commuting to your regular job, for example, is not a legitimate deduction.
TOLF can help you determine what tax deductions you qualify for. We’ll ask you simple questions about your tax situation and search over 350 tax deductions and credits to help you make sure you get all the tax breaks you deserve.
5. E-filing helps
On Jan. 24, 1986, the IRS received its first electronically filed tax return from a preparer. By 1990, taxpayers throughout the country who expected a refund could file electronically. Out of over 155 million individual tax returns received by the IRS in 2018, 138 million were e-filed. The IRS maintains that filing returns electronically can prevent mistakes and lower the odds of an audit.
- The error rate for a paper return is 21%.
- The error rate for returns filed electronically is 0.5%.
Few and far between
The word “audit” fosters trepidation in many people, but in reality the deep-tissue audits people tend to envision are fairly rare. According to the IRS, of the nearly 154 million individual returns filed for calendar year 2017, about 1 million were audited.
In the most common federal audits, taxpayers receive notices from the IRS asking about certain details of their returns and requesting further information or clarification. This is known as a “correspondence audit,” and even those are considered as rare as being struck by lightning.