Less than 1% of individual tax returns are audited. Your chance of being audited is about 1 in 160, so it’s pretty unlikely that you’ll be audited. However, there is always a chance that you could be randomly selected for an audit or a discrepancy on your return could trigger a tax audit.
You can never guarantee that you’ll be audited (and a tax professional can’t guarantee this either), but there are some steps you can take to reduce the chance that your return is flagged for an audit.
It’s worth repeating that many things can trigger an IRS audit. Obviously, inaccuracies on forms, claims for deductions which you do not qualify, or the failure to report certain income will result in problems. But it would be difficult to list every type of behavior that could result in an audit.
If you receive a notification from the IRS, please never ignore it. Such notices often specify a certain time for which to reply. Failure to reply can only lead to additional problems including penalties.
What triggers tax audits?
Some major reasons for tax audits include:
- Reporting significantly less income than received in prior returns: The IRS keeps close tabs on income earned every year, and it’s common for them to look back at your past filings and compare them with current ones.
- Missing tax forms: Whether you are a contractor or full-time employee, your employer will forward to the IRS W-2 information and copies of 1099 forms. Not including such forms in your individual returns alerts the IRS to a potential problem.
- Self-employment status: For a variety of reasons, the IRS pays closer attention to returns of individuals who are self-employed. For that reason, it’s especially important for such individuals to be accurate in all filings with the IRS.
- Claiming hobby expenses as business expenses: The IRS prohibits writing off expenses for hobbies. Therefore, take care when declaring expenses that have no legitimate tie with your business.
- Claiming home office expenses without documenting the business relation: When taking deductions for use of a home office, use of the office need to be entirely for business. Deductions are not allowable for only periodically conducting business in the home office.
- Excessive entertainment and meals expenses: Do not deduct such items without there being a legitimate business connection. The IRS will closely check on these sorts of deductions.
- Failure to report on overseas accounts and assets: We’ve stated many times on this blog the importance of accuracy in reporting on overseas assets. The penalties for inaccurate or incomplete reporting are severe.
While nobody wants to face a tax audit, a simple notification of an audit does not imply you are guilty of wrongdoing. However, the consequences are severe enough that you may wish to speak with experienced legal counsel regarding your options.
8 Ways to Avoid a Tax Audit
When selecting returns to audit, the IRS is looking for a few different things. Some of the things that might trigger an audit include:
- Forms that don’t match your returns
- Numbers that are way off of other people with similar demographics
- ID numbers that don’t match other taxpayers or employers who are reporting about you
A perfect return won’t completely eliminate your chance of an audit though. Even if everything looks accurate and matches up, the IRS randomly selects returns to audit. It’s a small chance; only about .009% of returns are audited.
A few ways to make sure you avoid the audit list include:
1. Don’t Report Zero Income
If you legitimately earned nothing, file a tax return and report that. But many of the returns that are flagged for audit are people who are self-employed and show a net loss for the year. The IRS will want to see if that is actually accurate and you truly had no adjusted gross income.
Over 3.5% of returns with a zero adjusted gross income are audited. The next income bracket that sees that high of an audit rate? Those earning between $500,000 and $1 million. No income and high income will draw the attention of the IRS.
2. Don’t Appear Suspicious
If your return appears suspicions in any way, the IRS will come looking. If you claim huge charitable contributions that don’t match up with your income the IRS will want to know more. If your home office expenses appear exorbitant, they’ll also be suspicious.
Overall, you should be honest and document everything that you are reporting on your return.
3. Check Every Detail
Small errors, such as transposing a number from your W2 or an incorrect social security number might flag your return for an audit. The IRS wants to see that all of the information promoted to them matches what is on your return. Check, double-check, and then check again to make sure everything is correct.
4. Check Your Mail
How many times have you received a 1099 form for investment income, freelance income, or some other income that you forgot about? Make sure you are checking your mail to get any forms that must be mailed to you, by law, by January 31.
Even a small amount of interest earned on your checking account must be reported. If your bank reports this to the IRS but it doesn’t appear on your tax return, the IRS will look more closely at your return.
5. Don’t Fudge Your Numbers
If you are deducting business or self-employment expenses, make sure you keep your receipts and deduct the exact amounts. A huge red flag is perfectly rounded numbers that are clearly fudged.
$500 for a computer, $700 for other office expenses, $300 for travel. It’s unlikely that your expenses will be that perfect. You need exact numbers, down to the penny, to have the best chances of avoiding an audit.
6. Fix Any Mistakes
If you make a mistake on your return and discover it later, file an amended return. You might be reluctant to do this, an amended return might increase your chances for an audit, a return with mistakes is much more likely to result in an audit.
If you notice a mistake, file the amended return. Don’t take a chance on the IRS finding it.
7. Don’t Make Too Much Money
The more money you make, the higher your audit risk. The highest rate of audits is found in the top income brackets. Once you make $1 million or more, your audit rate increases dramatically. Almost 35% of people making $10 million or more are audited.
Certainly, this is a very small percentage of people and chances are, if you’re reading this, you aren’t making $10 million a year. But, it’s important to recognize that as your income increases, so does your audit risk.
8. Don’t Guess on Deductions and Credits
There are certain deductions and credits that might make you more likely for an audit. Deducting medical expenses, home office, and self-employment expenses, and large charitable contributions are often scrutinized.
You should have documentation for any of these deductions and make sure you are eligible for them.
The Bottom Line
The bottom line of filing your taxes is, to be honest, double-check everything, and make sure you have documentation of everything on your return in case you are audited. Use these tips to do your best to avoid a tax audit.
One way to avoid worry about an audit is to use a certified tax professional to complete your tax return for you. If you give them accurate information, they will know the best deductions, credits, and allowable amounts for your situation.
If you do find yourself in a situation where you have been audited and owe back taxes, a tax attorney can help minimize the impact of those back taxes.
Our attorneys can help stop the IRS from garnishing your wages, putting levees on your bank accounts, and keep your tax payments and penalties reasonable.
Contact us today to see how we can help you work through your tax issues.
