How to stay under the IRS radar
The annual tax filing deadline is almost here. Maybe you are one of those early filers, but the vast majority of us wait until the last minute, or even beyond it, by seeking extensions. The one life event we all prefer to avoid is the IRS audit. While not necessarily the end of the world, it is unpleasant and a very time consuming experience that we could all do without.
An IRS audit is not automatic and in actuality, according to financial advisors, only about 1 percent of tax returns catch the attention of the IRS. The IRS reported that they audited 1.2 million 2014 US Returns. This is primarily due to less auditors due to government funding cuts. Probably the IRS would love to delve into many more returns if they had the manpower.
Reporting no income or reporting significant income tends to make you stand out more, and increases the likelihood that you will be audited. This makes sense. If you claim to have no income, the IRS will be somewhat suspicious that you are hiding something. If you are making $10 million a year or more, the IRS will be looking to see how they can take more money from you. According to Motley Fool, where you live also seems to increase your risk for an audit. From their analysis of 2014 audits, it appears that residents in the states of Hawaii, New York, Delaware, Michigan and Massachusetts had the highest risk of being audited by the IRS.
Regardless of where you live or the amount of income you earn, there are other factors that can raise a red flag for IRS agents. Here are 5 tips to help you avoid an IRS audit.
- Make sure the income you report on your IRS return matches what is written on those 1099s and W-2s that you received earlier in the winter. The IRS receives a copy of these income statements too. If the numbers don’t match up, you can expect a letter from the IRS asking for an explanation of the discrepancy. Once this happens, the door is then opened for further scrutiny.
- If you are receiving spousal or child support, be sure to report it. Your former spouse will and then the returns will be in conflict, causing both returns to be red flagged.
- Check, double check and triple check your return, especially your math. Using tax software or an online program is the best way to avoid mathematical errors if you are not using an accountant. Avoid the urge to round-off numbers. If your calculations do not add up, your return will catch the eyes of IRS staff.
- Be careful with your charitable deductions. Make sure to get a receipt for all your donations, whether they be cash or items, such as clothing. Also bear in mind that only a qualified charitable organization can receive your donations if you want to claim the deduction. If you have donated more than $250 during the year, be sure to get a written receipt from the charity. And even if you are one of those very generous people, claiming charitable donations that are way out of sync with your total income will bring you to the attention of the IRS.
- If you have a small business, or business on the side, be careful with your business deductions. Just by virtue of self-employment, you have already joined the group of those more likely to have their returns audited. Claiming unallowable or extraordinary business expenses, especially travel or a home office, will draw attention to your return. And while it is not uncommon to claim a loss the first year, to do so for three years in a row will make the IRS a bit suspicious about your honesty.