There are a few phrases that that make most of us cringe. “My mother is coming” has been known to strike fear in the hearts of stalwart men and women, but not as much as “we are being audited”. While we can’t help you with the first, there are ways to help most US citizens avoid an audit.
If history is any indicator, less than 1% of Americans will be audited by the IRS in the coming year. And while some of the audits are totally random, many audits are actually instigated by the taxpayers themselves.
Here are 10 ways to avoid putting yourself on the IRS’ radar:
- Check your math – While this may seem obvious, math is one of the top mistakes that taxpayers make. It’s one of the first things the IRS checks. If the numbers don’t add up on the first two pages of your tax return, ding, ding, ding! You’ve just called attention to your return. Double check all your figures, always. Even if you use tax software or a tax prep professional, their work is only as good as the numbers you give them.
- Don’t stand out – Unless you’re one of the unlucky random citizens who gets audited each year, it’s the unusual or the outlier returns that catch the eye of the auditor. For example, don’t try to give away more in charitable donations than you claim in taxable income.
- Double check your social security numbers – You might be surprised how often this happens. Numbers get transposed, you think you remember your kids’ numbers, or you switch numbers between two family members. Double check your figures. This is an easy one to do, and it can be an audit red flag.
- Call your kids – Every year we run into parents who claim their college age children as dependents, only to find out those same kids have already filed and claimed themselves. This never has good results. You can end up with both returns being pulled for examination. Your college age child can file their own return, but they need to mark they are the dependent of another. That way you get the deduction and they get whatever they paid in. Win – Win.
- Check your mail – One of the easiest mistakes is to leave off income from either a W-2 or a 1099. What you may not know is that companies who paid you for any kind of service will be reporting that same pay to the IRS. The company needs the deduction for their own return. If you don’t have a 1099 or a W-2 that matches? Ding, ding, ding – it’s a problem. So check your mail in January and early February and make sure you have all your documents.
- Be thoughtful about your deductions and credits – There are a lot of deductions and credits available to taxpayers. You may think they are right for you when in actuality you’ve phased out due to income or otherwise restricted. A particularly tricky one is to claim a refundable tax credit just to boost the size of your refund. 40% of the tax returns selected for audit claimed the EIC – or Earned Income Credit. If you aren’t sure about what you’re eligible for, read the instructions carefully or contact your tax professional.
- Show you make some money – When you report a loss on your business year after year, it signals to the IRS that something is out of the ordinary. If you can’t support yourself based on your tax return the IRS may want to ask you for more details.
- But…don’t make too much money – If you make too little you might attract the attention of the IRS, but if you make too much it can have the same result. Households with higher incomes are almost always more likely to be audited. Just .25% of taxpayers report income of over $1 million, however, those taxpayers made up 65% of taxpayer audits. In contrast, more than 13% of households reported income between $50K and $75K in Adjusted Gross Income, but only .47% were subject to audit. This is a case of “be as normal as possible”.
- Don’t Make Up Stuff – There are lots of people who don’t keep very good records and tend to guesstimate what they spent or how many miles they drove. (oh yes, it happens a lot) It’s not often that your mileage, your rent, your supplies, your advertising, your whatever all ended in double or triple 00s. Every once in a great while I’ll make a purchase that ends in 00 and the sales person and I both remark on it. Guess what? The IRS will remark on it too. It’s OK to round up to the nearest dollar, but not the nearest hundred or thousand. Don’t just guess and put in a bunch of zeros. KEEP YOUR RECORDS. (And for goodness sake, don’t say “it’s the same as last year!”)
- Fix Your Mistakes – It’s not a huge deal to file an amended return. While it’s no fun to admit you made a mistake, it’s way better than letting that mistake ride and then have it end up like the proverbial snowball that starts rolling downhill. Look out below! If something stands out, especially in comparison to your earlier returns, it might attract attention. Fix it now so that it doesn’t lead to further problems down the road.
As always, document, document, and document. Choose your tax prep person/form wisely. And lastly, enjoy these last weeks of holiday cheer before January and a new tax season rolls around.