For the average wage earner, the chances of facing an IRS audit are not very high. That said, there are some clear red flags the IRS looks for which could increase your odds of being audited — regardless of how much you make. Using these tips now, may help prevent an audit later.
What causes you to get audited by the IRS?
Red flags for the IRS include underreporting all your earned income, filing errors, and misrepresenting deductions.
According to the IRS, some tax returns are randomly selected for audit based on a statistical formula that compares your tax returns against others. Also, if your return involves transactions with other taxpayers, such as business partners or investors whose returns are selected for audit, you could be audited.
Report all earned income
File all 1099 forms you receive. Non-wage income earned from self-employment, dividend income, interest earned, or traditional IRA withdrawals is automatically reported to the IRS via 1099 forms. If you don’t report this income, the IRS will eventually be notified. This is a common IRS audit trigger. Honesty is the best policy; declare all your income.
Keep good records
Regardless of your income bracket, it’s not uncommon to try to lower your tax bill using deductions, credits or charitable donations. It’s best to only claim deductions and tax credits you have documentation to support. The same advice applies to high-income earners who make a very generous donation to a charity.
Generally, it’s best to keep records of every expense, deduction, credit or donation you claim on a tax return. Some of the more common issues the IRS flags include medical expenses and casualty losses. While documenting expenses won’t decrease the chances of being audited, it will prepare you if you are. So be sure to tidy your tax files.
Check and recheck your returns
The IRS encourages filing returns electronically instead of by paper because tax software programs can drastically reduce errors. According to TurboTax,® paper returns have a higher error rate than e-filed returns. Something minor like illegible handwriting on a paper return could jumpstart an inquiry from the IRS.
If you prepare and file your returns yourself, be sure to go over every line to catch any potential errors. If you’re worried you could make a mistake on your return, let a tax professional help. Members get a discount when using TurboTax online. The software has built-in checks that look for errors and help determine your audit risk and live experts who can help too.
The advice provided is for informational purposes only. Contact a tax advisor for additional guidance.
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