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Raise your hand if you’d rather face a root canal than an IRS audit.
For many people, the fear of a tax audit is enough to make them run and hide. Fortunately, fewer than 1% of the returns filed each year in the U.S. are chosen for review.
Still, there’s no clear-cut way to guarantee the IRS won’t stop and take a second look at your returns. But a good place to start is to avoid some of the common filing mistakes people make that can raise a red flag.
1. Missing Income
“The biggest thing that people can get audited for is not reporting all the income on their tax returns that’s reported to the IRS directly by their employer, their bank or their investment company,” says financial planner Brian Frederick, CFP®. “The IRS will make sure that everything that’s been reported to them is listed on the taxes.”
Sometimes misrepresenting your income is an honest mistake. But fudging the numbers on purpose is a big no-no. After all, the IRS receives the same copies of your W-2 and 1099 forms that you do.
If you get cash tips as part of your job, make sure you keep records of what you pocket. Frederick says that the IRS will compare your reported total income to what other people in your profession typically earn.
2. Sloppy Work
Your school teacher’s advice still holds true: Before you turn in your assignment, double check your work!
Start with the easy stuff. Did you choose the right filing status? Did you enter the correct Social Security numbers for everyone listed on your return? If you opted for pen and paper, is your handwriting legible?
Next, look for funky math. At a minimum, assume that the IRS will not only check your income statements but your arithmetic as well, so save yourself the hassle down the road. If you’re going old-school, review your calculations carefully — or better yet, consider using tax software or work with a tax professional to make sure your numbers make sense.
3. Large Deductions Without Proof
When you’re filing your taxes, you can choose to take either the standard deduction or to itemize your deductions (but not both). If you decide to itemize deductions, you’ll want to make sure you keep all the paperwork and receipts that prove those deductions are legit.
For example, if you choose to itemize your charitable contributions, the IRS may suspect you’re reporting more donations than you actually made if your donations seem out of proportion with the amount of money you make. So be prepared with evidence of your good will.
If you’re donating items like clothing or a vehicle, Frederick strongly recommends that you keep records, including a detailed inventory of what you donate and even photos.
For help, IRS Publication 561 or a tax pro can guide you in determining your donations' values.
4. Fishy Business Numbers
Heads up! New tax legislation has changed the rules of the game for what freelancers and small businesses can deduct. Make sure you’re up-to-date on which deductions are still valid before you fill out your next tax return, and get some clarity on the even narrower requirements for home-office deductions. And, as always, keep those receipts.
Also, make sure that your business expenses are “reasonable and customary,” cautions Frederick. For instance, while an entertainment writer might be able to deduct trips to the movies, the government would likely frown upon that if you, say, owned a lawn-care company.
5. Too-Perfect Figures
Round numbers are neat and pretty, but the feds know that round numbers rarely show up in real life. What are the odds that your tips were exactly $1,000 this year? Or that the supplies you ordered for your business were precisely $250?
Tidy numbers like those make the IRS worry that you’re just making up things up. Instead, enter your numbers exactly from the records you’ve kept. At most, you can round to the nearest dollar to make your calculations a bit simpler.
Sometimes, though, despite your best intentions, you’re the lucky winner of a sit-down with the IRS.
Keep your returns, records and receipts well organized — preferably in more than one place. Frederick suggests that you store the information at your home or business but also in the cloud, just in case (and of course, make sure wherever you store your files digitally has high security standards). Then, when Uncle Sam calls, you’ll have all your documentation ready to go.
If you operate a business, maintain a clear separation between your personal and business finances so your statements aren’t a mish-mosh of your work and home lives.
Finally, seek out a tax professional, who can usually head this off at the pass and can help clear up any confusion along the way. Although there’s a cost involved, Frederick notes that the expense could more than pay for itself.
This article is not intended as legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.