Watch Out for These IRS Red Flags to Avoid an Audit
An IRS audit can be a nightmare. Thankfully, only a small percentage of tax returns are audited. Here's how to further reduce your chances of getting picked.
The Biggest IRS Red Flags
The IRS flags for a reason. With deductions, that reason is usually that people take advantage of them. So, obviously, don't fudge the facts. If you do qualify for these deductions, claim them. Just take the necessary precautions, noted below. Here are some of the top IRS red flags.
Typos and Entry Errors
It seems like a silly way to get audited, but if your numbers don't match the numbers the IRS has on file, it raises a red flag. CPA Andrew Porter tells USA Today you should even double check numbers entered by a tax professional:
"Even if you have your taxes professionally prepared, Porter said, 'you don't want to just blindly sign and drop it in the mail. You have to look at it and know that your W-2 amount actually shows up correctly.'"
Large Charitable Donations
You might very well have donated massive amounts to charity last year. You're entitled to report it—just make sure its all documented. According to USA Today, large charitable sums also raise IRS eyebrows. Porter said:
"That doesn't make (a big donation) illegitimate. But you more likely than not will stand out and be audited. It's all about documentation."
Earning Over $250,000/Year
According to MSN Money. those who earn over $250,000 a year automatically become a bigger IRS target. If you're a high-earner, beware
your increased audit potential and be meticulous about your record keeping.
A Major Income Drop
A significant decrease in income also raises a red flag for auditors, Entrepreneur reports. The IRS will be wary that you may have failed to report income. Again, keep records of everything.
Business Losses & Schedule C
If you've had your business for three years and you're still reporting a loss, your audit potential increases, says Money Talks News .
"Chances are the IRS may view your business activity as a hobby, which is another red flag. And if you used a Schedule C to claim your losses instead of incorporating, that also increases your chances of being placed under a microscope by the IRS."
If your business really is losing money, what can you do? Definitely take your deductions. Just make sure you have the records to back them up.
The Earned Income Tax Credit
Last year, the IRS said tax returns that claim the Earned Income Tax Credit are twice as likely to be audited. According to the Wall Street Journal. "improper claims" of this credit cost the government over $10 billion a year.
Sometimes these "improper claims" are fraud, but sometimes they're honest errors:
"The EITC's complex rules help lead to high error rates by taxpayers and even paid preparers."
This deduction is often abused, so the IRS scrutinizes many returns that claim it. We've previously discussed this red flag. If your deductions are valid, make sure they're also well documented, in case of an audit.Source: twocents.lifehacker.com