Many Americans fear being audited by the Internal Revenue Service (IRS), but their chances of going through that process are extremely low. Most are honest and pay their fair share of taxes, after all, with one IRS survey showing 95 percent of United States taxpayers believe it is their civic duty to do so and that 87 percent say it’s unacceptable to cheat on their income taxes.
The fear is still there, though, even if most people do their best to stay on the right side of the law. Audits can happen for a lot of reasons beyond cheating the system, which leaves many taxpayers wondering how likely it is that the IRS will look into their information. Here’s what you need to know.
Facts about IRS Audits in 2021
Understanding your risk of being audited starts with understanding a little more about the IRS and how prevalent its audits truly are. Here are a few facts to keep in mind:
- One in 220 taxpayers was audited in 2019 — a significant decrease from a decade before when the odds were one in 90.
- The decrease came from a reduced tax agency budget and reductions in IRS personnel.
- COVID-19 may have lowered the likelihood of audits in 2020. Many IRS offices are still closed, and pandemic restrictions make the process challenging.
- Wealthier taxpayers may soon have a greater chance of being audited in 2021. The IRS was criticized for auditing too many lower-income taxpayers in 2018, and has since said it would examine more high-income individuals.
- 30 percent of high earners were audited a decade ago, but just 7 percent of them went through the process in 2018.
- Taxpayers with lower incomes and who claimed the Earned Income Tax Credit meanwhile made up 39 percent of all audits that year.
The 2021 proposed federal budget would increase IRS funding, which could lead to hiring more auditors to support an increase in those conducted on the wealthy. Middle earners (below $200,000) seem to have the lowest chances of being audited, however.
6 Tips for Avoiding an IRS Audit
It’s impossible to predict exactly how many people will be audited in 2021, but there are steps you can take to significantly lower your risk.
1. Keep Better Records
Many taxpayers make mistakes on their returns because they forget about forms they’ve received or certain streams of income. Keep all applicable records throughout the year, including documents like expense receipts, and store them in one place.
Wait until you have all the necessary forms and documents before you start to file. This will help you avoid confusion and omissions that will need to be amended.
2. Be Reasonable with Deductions
Make sure the deductions you claim are reasonable and within the normal limits of what you would regularly submit when filing your taxes. If you find you need to claim something that might be out of the ordinary, be sure you have the proper documentation to back up why it should be allowed.
Abnormal itemized deductions that do not have proper documentation become red flags to the IRS, thus triggering an audit. It helps to make sure you’re aware of the deductions you’re eligible to receive, too, because these often change from year to year — sometimes without warning. A tax professional can help you sort these out if you’re unsure what counts as a “reasonable deduction.”
3. Don’t Attempt to Lie to or Cheat the IRS
This may seem like an obvious point, but many people try to cheat the tax system every year by claiming excessive or unreasonable deductions or trying to make themselves fit into loopholes that don’t apply to them. This only increases the chances of an audit, because the IRS has systems in place to flag such claims and request additional information.
Penalties occur if you make claims and cannot support them with appropriate documentation, making the decision to lie or cheat a dangerous gamble. If you are truthful about what you earned, however, and report the right deductions and credits, it is unlikely you’ll be audited or have a negative result from an audit.
4. File Electronically
The IRS encourages taxpayers to submit their returns electronically because electronic returns are more accurate than their paper counterparts. The error rate for paper returns is 21 percent, according to the IRS, but just 0.5 percent for e-file returns. This is because the system was built with safeguards in place to help minimize such issues.
5. Be Careful with Home Office Deduction
Many people are tempted to overdo home office deductions when they run businesses out of their homes or work as independent contractors. Such deductions need to be well within the definition of “reasonable,” as it could be a huge red flag to the IRS if you claim a home office deduction that is a significant portion of your income.
In other words, don’t try to deduct your entire monthly rent as your home office deduction, but instead claim just the percentage of your home that is actually used solely as a workspace. Any claimed work expenses must also be completely business-related.
6. Work with Qualified Tax Attorneys
Partnering with experienced tax attorneys gives you a much better chance of accurate reporting, which will also help you avoid an IRS audit. These experts can review everything for you and ensure you’re following all guidelines and regulations that apply to your situation, plus help you define “reasonable” claims and make sure you’re taking advantage of any deductions you might not know you qualified for.
Looking for Tax Help?
Filing taxes and staying up on changes to the process is often time-consuming, intensive, and intimidating for taxpayers. No one wants to make a mistake that lands them in hot water with the IRS, and those who find themselves facing audits likely have no idea which steps they should take to protect themselves.
Silver Tax Group’s qualified tax attorneys are here to help you avoid audits in the first place, or manage your audit defense if you end up facing one. Gain peace of mind and take the right steps with our team of tax professionals on your side. Contact Silver Tax Group today for more information or to get started.