If you have ever been audited by the Internal Revenue Service, you know well the hassle it can cause. What you may not know, however, is why you were audited. On the other hand, if you have never been scrutinized by the all-seeing eyes of the IRS, you probably want to keep it that way. To help you avoid raising any red flags, inside this post, we are going to look at some common reasons you might get your taxes audited.
It is no secret that the number of individuals that get their taxes audited each year is on a steady decline. In total, less than 1% of filed tax returns caught the eye of the IRS last year, and as the budget for the Internal Revenue Service continues to drop (the organization has seen a steady decline in funds the past few years), that number will only continue to fall, as fewer resources are available to actually perform the auditing.
Tax Audit Red Flags
While your odds are good that you will never be pulled aside for further inspection, there are some things that novice and professional tax prepares alike need to be aware of in order to avoid raising a red flag that could, ultimately, result in a tax audit. This is true for individuals and small business owners alike.
Bringing Home the Bacon
Fair or not, tax filers that make more money than the average Joe are automatically at higher risk of receiving a red flag. If you make $200,000 or more, you stand a higher chance of being inspected. Go beyond the million dollar mark, and your odds go from one in 120 (for individuals less than $200k per year) to less than one in fifteen. That is quite a significant drop!
Because of this, high-income earners need to be extra cautious when having their taxes prepared.
Not Reporting Income
Of all of the mistakes you can make when filing your taxes, not reporting all of your income has to be the easiest to avoid. If you received a 1099 or W-2 from an employer or boss, you can bet your bottom dollar the IRS did too.
When the IRS computers compare the data they receive from employers to the data that you submitted, the mismatch will throw up a red flag and Uncle Sam will have to take a closer look at your tax filing. Skip the hassles, and make sure you report all of your earnings!
Taking Too Many Deductions
As a tax paying citizen, you are well within your rights to take any deductions that you are eligible for. However, creativity by well-meaning tax professionals and tax hobbyists can often blur the lines between what is a legitimate tax deduction or tax write-off and what is not. The IRS has been performing its job for many years now and have gathered data on what the average deduction is for virtually every income level. If your deductions are higher than the average for your income bracket, you could raise a red flag and be audited.
That being said, if you feel your items are legit and claimable, and – this is important – you have proper documentation (ie; receipts), never let fear of a tax audit deter you from claiming what is rightfully yours. Just be aware of what you are allowed to deduct and what you are not, and all should be well in the world!