Nobody wants to be audited by the IRS, period. Although only about 1% of taxpayers actually get audited each year, many worry that this year may be the year that they get chosen for an in-person meeting with an IRS agent. Audits are not chosen at random willy-nilly, but rather by a computer-generated score given to each return by the IRS. Scored by their “discriminant function” system, or DIF, the computer takes into account common variables that may show a need for an audit. Once picked for an audit, an actual human agent takes a look at the return to determine if it is truly necessary or not.
As taxpayers, we can reduce the chances of being audited by avoiding the red flags which can trigger one, and with tax time rapidly approaching I figured now would be a good time to discuss some of them. Let’s take a look…
- Don’t ever lie about your income. Ever. The IRS receives copies of your W-2 or 1099 forms just like you do, so they can verify your income claims (or missing amounts) on your return.
- If you still write out your return by hand, write legibly. Bad handwriting could trigger a nice letter from the IRS asking you decipher your own words/figures.
- Do not exaggerate deductions or write-offs. This is almost a guarantee that you will be audited, if your deductions or expenses you are trying to write off are excessive.
- If you have an actual home office, go ahead and claim it as such. But if your “home office” is actually your dining room table, do not even try to claim it. Make sure that’s the room you do work from and it isn’t used for any other purpose.
- When doing your own taxes, have someone else check the math for you before you submit it. No, you don’t have to give a complete stranger access to your info, but asking your brother or a close friend to take a look can’t hurt any.
- File on time. Nothing calls attention to a return like a return filed late. Can’t get it in on time? File an extension. Basically, file something…anything.
- Use a well-known tax software to do your return. “Joe’s Big-Money Tax-Avoidance Software” from your local PC store isn’t viewed the same as a Tax-Cut or TurboTax.
- If in doubt, find out. When you aren’t sure about a deduction, expense, a claim, or whatever, find out before just putting it in your return.
- Have something potentially confusing on your return? Attach a note from yourself to the IRS explaining it. My mom did this one year with no problem at all.
- Make sure your State and Federal returns match up. Your income, etc. should be exactly the same on both returns, and if it isn’t you could be audited.
- Report only legitimate losses. Never overestimate losses and be sure to have paperwork to back up your claims.
- Claiming too much in charitable donations can trigger a red flag. Remember when I said my mom sent in a note with her return? It was because of a large amount of donations stemming from cleaning out some rooms in the house. The note explained why there were so many donations.
- Save everything. OK maybe not everything, but keep backup documents for three years and tax returns for seven.
- Keep in mind that large changes in income from year to year can send an agent your way. Make $100,000 last year but only $19,500 this year? Better have some documented reason why, lest the IRS think you are hiding income.
Well, there you have it — some reasons why your tax return may trigger an IRS audit. Have you ever been audited? Have any other advice for the readers? Please share in the comments!
(photo credit: Robert S. Donovan)