“Worried about an IRS
audit? Avoid what’s called a red
flag. That’s something the IRS always
looks for. For example, say you have
some money left in your bank account after paying taxes. That’s a red flag.” – Jay Leno.
How likely are you to be audited?
Good news—bad news. The good
news is that even with electronic filing, the volume of returns makes
thoroughly checking each return impossible.
According to the IRS, if your income is $100,000 or less, you have a 1
in 100 chance of being audited, if you make a million dollars or more, a 1 in
11 chance.
However, the bad news is
every year they are increasing the audit rates, and they can match documents
such as 1099’s to your return more efficiently. They
are also “under the gun” to find more ways of increasing revenue to help the
government pay for the deficit.
The following categories
of people usually have a substantially higher risk of being audited than others:
- Self-employed folks
- Businesses with few employees but many
independent contractors
- Businesses with heavy travel and entertainment
expenses
- Individuals deducting large amounts such as
house mortgage interest with little income
Four key ways to avoid an
audit…
- Get Organized! Try to
put all of your tax information in a filing cabinet or box. This will not only save you stress but
will save you money, especially if you have to have your returns redone
because you forgot part of your tax records. Having your information organized will
also help you in the event that you get audited.
- Report ALL taxable income! The IRS calculates probabilities of incorrect information as well
as the probability of unreported income.
According to what I have been told, when they receive your return,
it is programmed into a computer which checks your figures against any
W-2’s, 1099’s, or other income documents with your social security number
on them. It also checks your deductions
to see whether they are “in the ballpark” of others in your profession or
income bracket around the country.
If your figures look “too large” or even “too little”, your return
is flagged, and an auditor takes a look at it, especially if this is a business
return.
Folks— the IRS is not stupid. If you report very little income with several
children, or little self-employment income with large deductions, well, I
suggest you had better be ready for an audit.
Folks who deliberately claimed the Earned Income Credit and the First Time
Homebuyer Credit when they did not qualify for it are being investigated,
according to the IRS website. Consult a
tax professional like MTL, and get your return prepared correctly.
- Remember
that you’re married (or not). Your marital status is determined as of
December 31. It doesn’t matter if
you just got married (or divorced) on December 31 or if you’ve been
married (or divorced) for the entire year. You are not head of household unless you are
(a) a single parent, or (b) have children and have been living apart from
your spouse for over half the year.
You are not head of household if you are married and living with
your spouse, even if he/she has chosen not to file. Don’t file using the wrong marital
status, and don’t file without the proper number of signatures—a joint
return obviously should have two signatures. Your spouse may (someday) forgive you if
you forget you are married, but the IRS won’t. If you are unsure of your correct
status, don’t just guess at it—contact the Memphis Tax Lady who
will help you determine your correct status, thereby avoiding costly fees
and penalties. By the way, children
born before or even on December 31 count as dependents!
- Remember to sign the return! It is unreal how many folks forget to sign their returns which
can cause an IRS red flag. The Memphis Tax Lady (MTL) marks with a red pen where a client is
to sign and date their returns helping to avoid this problem. Also, as the
IRS does pay attention to sloppy returns and math mistakes, MTL makes sure
your tax forms are accurate, neat, and organized.
Remember…it
is not unusual for an IRS audit to occur eighteen months or more after your
original return has been filed. MTL is
open year round and is available if you need assistance. If you are a MTL client in the Memphis area, I go with
you to the audit free of charge.
Sources for this article
include Kelly Phillips Erb, writer for walletpop.com/top-10-ways to avoid a
tax audit, January 28, 2010 and Tracy Coenen, CPA, MBA, CFE, More IRS
Audits on the Horizon, January 22, 2008, at
allbusiness.com.