Tax audit worries? 5 red flags that the IRS looks for — and how to avoid them
Learning you are going to be audited can strike fear in even the most seasoned tax filer. You second-guess your math and wonder if you were too bold with deductions: Hello sleepless nights.
The IRS audited about 0.7% of all individual returns in 2016. And the more money you make, the more likely you are to have the honor. In fact, statistically, people making $1 million or more a year have a 10% chance of being audited, whereas less than 1% of those who make $200,000 or less get audited.
While you can't completely eliminate the possibility of sitting down with an envoy of Uncle Sam, you can take steps to reduce the likelihood your file will end up on an IRS agent's desk. Here are five ways you can lower your profile with the IRS and sail through tax season.
1. Be logical with deductions
You should always take every deduction you're entitled to, but don't go overboard. "The IRS is looking for deductions that don't make sense," Mike Campbell, a certified public accountant and tax partner at BDO USA told CNBC.
Specifically, they scan for data patterns that don't fit the norm, such as charitable deductions higher than your taxable income, or if the size of your home office changes each year, as Forbes noted. If your claim is true, go for it; just make sure you have records to back it up.
2. Pay attention to write-offs if you are self-employed
Being self-employed comes with an abundance of freedom, but also complexities during tax season. While it is perfectly normal to write off expenses associated with your business, certain write-offs could alert the IRS for an audit.
For instance, large write-offs for hotel stays and restaurant bills could be a red flag, so keep all receipts for any expenses over $75. Also, even if you use your car mainly for business, claiming it as 100% for business — especially if you don't have another vehicle for personal use — could put you in the audit pile.
3. Double-check your math
According to the IRS, math errors are one of the most common mistakes they find each year, and if you file with a paper form, double- and triple-check your figures. You should also double back if you use tax software. Even though the math is done for you, taking a few minutes to double-check your figures could save you from submitting an inaccurate form.
Also, as tempting as it might be to round or average figures, avoid doing this, as the IRS will consider your return to be sloppy and think the rest of your numbers are inaccurate, according to the Denver Post. For example, If your total deductions are $11,997, don't report it as $12,000.
4. Go over your personal information while you're at it
It's easy to gloss over the mundane, usual information, such as your address and social security number. But jumbling numbers, especially if you are rushing to complete forms, is another alert to the IRS for an audit. Even if you can rattle off the information in your sleep, look back and review any personal information before you submit your forms.
5. Never ever lie
Simply put: "It's never a good idea to try to cheat the tax man," Dave Du Val, chief consumer advocacy officer at TaxAudit.com, told CNBC. This means reporting all your income, including any side job that has a 1099-MISC or 1099-K.
If you are going to claim an expense, don't pull a number out of thin air that you think is probably about what you spent — have hard evidence. And claiming ignorance or that no one told you the rules isn't going to fly, either. "U.S. Tax Court is not a court of justice, it is a court of law," Du Val said.
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