In the year 2020, there were 10,890 IRS tax audits for people who make more than 1 million dollars a year. Now, your first reaction might be, well, I’m not in that group so I don’t have to worry. The IRS also completed 509,917 audits last fiscal year in total. Now that’s a number more likely to get your attention.
You wouldn’t be alone in your thinking if when you submit your taxes each year, you have a moment where you worry about a potential audit. Who gets audited the most? Are you an IRS tax audit risk because of how you file your taxes?
Nobody likes the thought of facing an IRS tax audit, so how can you avoid an audit yourself? Read on for these tips on how to avoid audits by the IRS. That doesn’t mean people of middle-low income levels are immune to audits. Anyone may receive an IRS letter 525. No matter what your pay scale, any IRS audit notice will leave you wondering about the steps you need to take.
Keep reading for our list of information on what your obligations are, how to respond to IRS letter 525, what the legal process requires, and how to secure the best possible outcome.
1. Making Math Mistakes
This is like the math teacher you once had in school who reminded you over and over again to check your math. There are a lot of numbers that go on a tax form each year and the spaces are small. If you’re not a tax professional who works with these forms all the time, it can be easy enough to make a mistake. It’s also pretty darn easy to fix before you actually submit the tax paperwork. Yet, the IRS says one of the biggest mistakes people make on their tax forms each year involves math errors. When you file electronically, the computer actually helps with avoiding a math mistake. Yet, you still need to enter the numbers correctly.
2. Check Social Security Numbers on the Forms
Your social security number is how the IRS identifies you. Like a math error, it’s not uncommon for people to transpose numbers when they’re recording them.
You might also be entering the social security number of a spouse or children that aren’t as familiar to you as your own. This is an easy spot to make a simple mistake and an easy one to check too. If you enter the wrong social security number, the information on your tax form won’t be connected to you. It will be hard for the IRS to act, good or bad, on your tax forms.
3.Honesty Is the Best Policy
You’ve heard plenty of stories of people fibbing, stretching the truth on their taxes in an effort to make some money back in a return. The truth is that it doesn’t make sense to lie on your tax forms.
If you do get an audit and you’ve lied, it becomes even harder to support your case in front of the IRS.
The IRS is pretty darn good at spotting it when someone has exaggerated the numbers.
If you do lie and the IRS catches even the smallest of lies, be prepared for them to start for other things you’ve potentially like about too.
4. Take Realistic Deductions
This falls under the same purview of being truthful. Many people will consider deductions that aren’t consistent with how much money they actually make.
Unrealistic or huge deductions can be a red flag for the IRS. If you make very little money and are donating 40% of your income to charities, it doesn’t seem realistic to them. And what happens if you get audited and don’t have receipts?
If you claim certain business deductions, you want those deductions to be in line with the type of work you do. You also want the amount to seem realistic to what you make while working.
Pay attention to the amounts you’ve used for deductions in the past. If suddenly your deductions are enormously larger in amount than ever before, it’s a red flag for the IRS.
It really comes down to claiming deductions that are legitimate and that you can back up with receipts and you shouldn’t find yourself in an audit.
5. Safe Ground in the Middle
Most filers fall into the middle ground of income. They make less than an average of $200,000 and are historically left alone for IRS tax audits.
Those high-income filers, say over million-dollar earners, are much more likely to be the target of an IRS tax audit. Typically, as a high-income earner, you also have a greater number of deductions on the tax form. This is more likely to be scrutinized by the IRS than a middle-income earner.
Surprisingly, often low-income earners are scrutinized too and are more likely to face an audit. Having said that, if you’re in a low-income tax bracket, don’t own a house, or have children, then your chances of an audit are low. This is assuming for all groups, of course, you haven’t made any math errors on your tax return.
6. Failure at Reporting All Taxable Income
Another area that gets the attention of the IRS is when a filer doesn’t include all of their taxable income in their return. This is likely to happen when you leave off income from a 1099 form.
1099 employees are often independent contractors and freelance workers. It’s likely they may have worked for a variety of employers over the course of a year. If you’re a 1099 worker, it’s important to keep track of who you’ve done work for over the course of a year.
If you fail to get a 1099 form from someone, but still had income you should include it on your 1040 form.
Remember, the employer is still reporting to the IRS. So, your records for income need to match those of the IRS. If the IRS finds they don’t match and the amount is small, they may send you a letter telling you they’ve made an adjustment to your return. If the amount is larger or there are multiple inconsistencies., then you could be facing an audit.
7. More Money, More Audits
Only 1 out of every 167 tax returns faces an audit. Those are pretty good odds, even without looking at the tax return. As was already mentioned though, the more money you make, the more likely you are to face an audit.
Those above the income threshold of $200,000 face a much greater risk of an audit. 2.21% of taxpayers who earn $1 million to $5 million are at risk of an audit.
There’s isn’t much you can do here to help you avoid the audit. Your income is what it is. Having said that, if you know you’re a part of that higher income bracket, you know you’re at a higher risk for an audit.
This means you need to be more diligent about deductions and the receipts to back them up.
8. Abnormally High Charitable Deductions
Most people over the course of a year make donations to charity. Some people keep track of the donations with receipts carefully. Others simply make the donation and then don’t claim it.
But most people understand that charitable donations are a good thing to use for a deduction on their tax filing. The IRS knows this too. They also know statistically how much the average person donates to a charity that’s in the same income bracket as you.
If your charitable donations are significantly higher than the average person and don’t really align with your income, your return may be scrutinized and open to an audit.
9. Business Owners and Schedule C
There are two things the IRS knows about business owners or sole proprietors. First, they historically have many deductions, some that may not be legitimate. Second, they don’t always claim all of their income.
This automatically makes a business owner who files Schedule C forms at a higher risk for an audit.
Two additional red flags for IRS auditors is if a business claims very high losses and very high deductions. A business that has historic losses over and over probably isn’t going to stay in business.
If you run a cash-intensive business, where much of your income comes from cash, you’re also at a higher risk and need to be careful to account for both income and deductions.
10. Not Filing At All
The IRS expects you to file your taxes yearly. It might come as a surprise to you if you’re responsible and do what you’re supposed to do, that some people don’t file their taxes as they should.
Not getting a tax return from you, makes the IRS want to take a closer look at your taxes.
Again, this is especially true for higher-income wage earners. Remember, the IRS is in the business of collecting tax dollars. If you’re a high-income earner, the IRS wants to make sure you’ve paid what you’re supposed to pay. This makes you more open to scrutiny, especially when you don’t file your tax returns like expected.
The IRS imposes severe tax penalties and interest, so working out a payment plan or securing a loan that allows you to pay the balance are your best options. You may also want to consider using the IRS Fresh Start Program. This program allows people who owe back taxes to pay their obligation without the risk of liens being placed against their homes or vehicles.
11. American Opportunity Tax Credit
The American Opportunity Tax Credit allows parents to write off college expenses for dependents for up to four years. The deduction is worth $2,500 for books, tuition, and but not living expenses for college.
Early in the program, many parents continued to use this deduction beyond 4 years. The program is phased out for higher-income earners, usually above $160,000 for married filers.
Because some filers took advantage of the program and used it beyond its intention, the IRS has really started to watch those filers who use this as a deduction.
They will watch for:
12. Sign Your Tax Form
Forgetting to sign your tax form will not necessarily get you an audit. It will, however, have the IRS looking more closely at your return. You don’t want to give them a reason to scrutinize your return more closely, which could potentially lead to an audit.
You’ll surely get your tax return rejected and have to resubmit, slowing down the processing.
Don’t Risk IRS Tax Audits Alone
The idea of facing IRS Tax Audits might seem daunting. The actual chances of landing in an audit are relatively slim. You can reduce the odds of an audit by preparing your tax forms carefully and checking them over for potential errors.
If you need help with your taxes or facing an audit, we can help. Contact us today so we can start helping you deal with the IRS.
Contact Silver Tax Group using our convenient online form or call today to schedule a consultation regarding your tax-related questions.