The 10 Most Common Things That Can Trigger a Tax Audit (Part One)
What, even, is a Tax Audit Anyway?
Nothing strikes fear into the hearts of an American taxpayer like the word “audit.” But there really is nothing inherently bad about them. An audit is essentially a review and examination of an individual’s, business’s, or organization’s tax records and returns to verify that there are no discrepancies in the numbers. There are a couple of different types of tax audits that are conducted, but more on that in a later blog.
Where fear of the dreaded tax audit is concerned, if you have nothing to hide and are completely honest and forthcoming then you have nothing to worry about. If, on the other hand, you have some sketchy deductions, expenses, income information, etc. on your returns, then beware. Because there is something to be afraid of.
Luckily, however, tax audits are not as common as you may think. They only really happen to about 1% of the population. And so folks, here they are. The ten most common tax audit red flags to be on the lookout for.
Red Flag #1 – Failing to Disclose all Taxable Income
Well, when it comes to the IRS there’s no such thing as omitting or “forgetting” to report all taxable income. If you do, there’s a good chance they will catch you eventually. After all, we must “render to Caesar the things that are Caesar’s…” In other words, pay your taxes! Don’t screw around when it comes to your taxes or the IRS. on the IRS is concerned. Make sure you report all of your information properly and don’t leave out important details. It is also imperative that you are honest and forthcoming about how you earned said income. No amount of money is worth the personal stress, hefty penalties (along with still having to pay those taxes), and not to mention, possible jail time.
Some don’t realize that when they are being asked to report all of their income, what exactly that entails. So let me spell it out for you in plain English. Income includes, but is not limited to: any freelance work you do; any income you may have collected from your investments (e.g. stock dividends, bond interest payments, interest payments from the bank); gambling or lottery winnings; rental income, etc. etc. Basically, if you received any monies, it MUST be reported. And if you do have income coming in from a variety of sources, be on the lookout for any necessary forms, such as 1099s, in the mail (or email if you have signed up to receive them electronically). The IRS has a record of what you were paid already due to the information that the entities you are receiving the monies from have reported to the IRS.
Red Flag #2 – Earning High (and Considerably Low) Income
Although tax audits are not that common among the general population, there are certain sub-groups that they are more prevalent in. This is especially true when it comes to the wealthy. In fact, according to statistics from 2012, those who earned more than $200,000 have an audit rate of about 4%. That is four times higher than the average of the general population. That may not seem like much but it only goes up from there. The results for taxpayers earning 7- digit incomes are even more staggering. In fact according to 2012 data, those who earn upward of $5 million and more are 21% more likely to get audited and that number jumps to 30% for those earning more than $10 million. Maybe that’s why we often hear tales of celebrities getting caught with their pants down by the IRS, such as Wesley Snipes who was even incarcerated for his tax evasion.
If you are reading this, you’re probably thinking “so what? I don’t make that much so I’m in the clear.” Well not necessarily, this is only trigger #2 so there are a ton of other ways you can find yourself on the wrong side of the IRS any given year.
It should be noted that those on the low end of the spectrum are also more likely to get audited, especially if you wind up with no income to report on your tax return.
Red Flag #3 – Mathematical Errors
Regardless of how poor you are at math, it is essential that you simply do not make any mistakes on your tax returns. This is why it is best to use a computer program to file your taxes rather than doing them by hand…but more on that later.
When the IRS receives your taxes, they run them through a computer so if you dropped the ball with the math somewhere along the way, it is definitely going to trigger a red flag.
So before you send off any paperwork or tax return forms, check and double-check to make sure that your numbers are right. This is very important even if you do use computer software. The computer software can only compute the numbers YOU put in. So if you put in a 3 somewhere where you should have entered a 4, it is going to trigger an error or red flag and quite possibly lead to an audit. Imagine how upset you’d be with yourself if that happened, knowing how easily it could have been prevented if only you were more thorough and diligent where your taxes are concerned.
Red Flag #4 – Using Neat/Round Numbers Instead of Actual Figures
A lot of taxpayers make this mistake because they simply do not know any better. They think that they are making life easy for the IRS by simply rounding their income, expenses, deductions, etc., instead of reporting actual figures. This is an innocent mistake that can really land you in hot water. When the IRS is reviewing your tax returns, they expect to see actual figures, down to the dollar. So keep all your receipts, and create a simple spreadsheet starting at the beginning of every tax year or season which shows exactly what your figures are. With the computer age, it has never been an easier time to do this. You can simply scan and save all images and documentation of your receipts and expenses to a folder on your hard drive so that you have them forever. You can even use your smartphone to take photos of receipts.
Red Flag #5 – Hiring a Sleazy Tax Preparer
This next red flag may come as a shock to many as it doesn’t seem like it is something the taxpayer should be held responsible for, but it is. If you retain someone who is of ill-repute to prepare your taxes, you’ll likely attract some unwanted attention by the Service. Sometimes he or she may use less-than appropriate methods. So if they are making promises that sound too good to be true, be wary. Also, as a side note, if they base their fee off your tax refund, that’s a red flag right there that you are dealing with someone who doesn’t exactly use ethical businesses practices.
Remember, if the IRS comes calling on you, you won’t be able to talk your way out of trouble by blaming your tax preparer. You are still ultimately responsible for everything that goes on your return. So make sure you do your research and pick someone with a good reputation.