Avoiding an Audit

“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.