The chances of getting audited are slim to none – 99% of tax returns skate by without a scrutinizing glance. However, put it into perspective: that means 1.2 million individuals were audited. So how to reconcile these stats? Know what makes you more susceptible to Uncle Sam’s wagging finger. Read the top ways to trigger a tax audit below, and avoid becoming one of the few.
Failing to report all of your income isn’t a smart tax-evasion strategy. Anyone who gives you a W2 or 1099 also reports that to the IRS. A machine matches the numbers and spits out a bill if they don’t align. Gather your documents and punch all of the numbers a few times for an accurate sum, and don’t forget to use your official W2s as opposed to paystubs. Otherwise, you may get a letter audit.
Despite abundant information (we’ve talked about it extensively!), there are those who are resistant and neglect to report foreign accounts. Although you now have to fill out Form 8938, there’s a perception that those with foreign accounts are trying to hide something. If you have a foreign account, especially with a high balance, trust in a tax professional to make sure all is well when reporting. Don’t make the mistake of not following the requirements – accounts must be reported when all of them amount to $10,000 or more at any time. Further, the penalties of not reporting foreign accounts are mighty grim.
Taking deductions far beyond your income is a huge flag to the IRS. The most liberally-taken deductions fall under business expenses, normally for meals, travel, and entertainment. The IRS has occupational codes for your position’s typical expenses. If you’re reporting 20% above this rate, beware. Claiming 100% business use of a vehicle is another separate, but less offensive, red flag. The IRS knows this isn’t very likely, and if it is, they’ll need mileage and calendar log documentation as proof. Other, more specific and less common deductions also cause eyebrows to raise, such as taking large charitable deductions that are disproportionate to your income.
A straightforward factor that can be a red flag is a high Income. If you make $200,000 or over, you’re much more likely to be audited, and the odds soar if you make over $1 million. 35% of those who made $10 million or more were audited, for example. This is something you simply can’t avoid. The worst idea would be to not report all of your income to reduce the chances, as detailed above.
The IRS keeps an eye out on rare claims and activity. Taking an early payout from an IRA or 401(k), or making large, excessive cash transactions, are just some example. Documentation for everything is becoming increasingly necessary, especially if you know a claim or deduction you make on your taxes is less common or falls under peculiar circumstances. Audits by the IRS are fairly likely in general terms, but can be damaging in the form of tax evasion.
Although the above can send signals to the IRS to audit, there’s good news. When audits do occur, they’re often reconciled through the mail (don’t rely on tv drama-like scenarios of kicking down the doors to your home office), and better yet, several audits actually result in the IRS owing you a larger tax refund. Simply avoid unlawful claims and non-reporting, trust in a tax professional, and you’ll have nothing to fear.