When you read about how many problems the IRS faces these days, you might conclude that it’s easier to “get one over on them” and therefore play it fast and lose when you file your next tax return. The IRS is facing challenges but don’t think for a minute that the rooster has left the hen house.
Despite the hurdles the IRS faces right now, you’re still probably going to get caught if you try any monkey business when it comes to filing your taxes. They may be distracted a little, but the IRS is still hungry.
While some of the people who are audited are chosen randomly, many of those who find themselves under the IRS microscope are there by choice. That’s right. There are certain tax tricks that significantly increase your odds of being audit. Here are 5 of them:
1. Non-monetary Donations
You get a deduction if you donate a car, clothes, household furniture and appliances etc. And not only that; you get to determine what the value of all that stuff is.
This rule tempts many people to overestimate the value of the junk they’ve given away. but it’s a bad idea. If you are donating old stuff, look up its market value when you do so.
I suggest using Craigslist if you have no other source and maintain your research just in case you get audited. Also, keep in mind that the IRS pays special attention to donated goods which are valued at more than 30% of what the original sales price is. If you are going to use a value higher than 30%, have a darn good reason for it. And if you are donating something worth $5,000 or more, you’ll need a written appraisal.
2. Data Entry
When you either put the wrong number in or make a simple math error, that’s just like raising your hand and telling the IRS, “Pick Me!” Even tiny mistakes count.
If you want to keep the IRS eyes off of your tax return, make sure you input your data accurately and that your math is correct. If you use a good tax preparation program, this shouldn’t be a problem as most check your work for you. If your CPA does your taxes, they probably have a program that also checks for errors like these. But it never hurts to give your return a final once-over no matter who prepared the return.
3. Correct Name, Address and Signature
If your personal data doesn’t line up, expect some contact from your friends at the Treasury. And even if the only mistake you make is that you forget to sign the return, it acts as a red flag.
You and I may view minor mistakes as just the result of being human but the IRS sees it differently. They think that if you forgot one item or made an error on something very elementary, you are likely to be the kind of taxpayer who makes other mistakes. That’s why they target people who make (seemingly) minor errors.
The good news is you can easily avoid being audited for this reason if you are simply careful with your work and make sure to have someone else check to confirm it is complete.
4. Failure to Report All Your Income
Of all the red flags, this one burns brightest. The IRS knows how much money you made last year. That’s because the people who paid you told them. So it’s super easy for the IRS to lock on to you when you don’t fully report your income.
Some people think that if they work for cash, they won’t have a problem. Fail. If someone pays you cash and they get audited, they are going to be asked where the cash went when the IRS sees that big withdrawal. If this leads to your door, expect a very loud knock from the IRS – soon.
5. Unbalanced Income or Deductions
If your numbers are out of line (percentage wise) the IRS is going to get interested. Someone I met years ago lived in a pretty ritzy neighborhood yet only reported $10,000 annual income. That didn’t seem right to the IRS so they dug into his financials and found that he was under reporting his income – big time. They caught this fellow because his reported income didn’t square with his lifestyle.
And there are other anomalies which draw attention to your tax return. Let’s say you own a small painting business and report $65,000 income with business deductions totaling $40,000. If the IRS knows that most people in your business report much lower deductions, and a much higher net income percentage, those business deductions act as an invitation to the IRS to come and take a look see.
I explained the five big audit flags above but there are a few more important details I’d like to share with you.
As you earn more money, the chances of being audited increase. If you are “cursed” with earning more than $1 million a year for example, the odds of being audited go up to 1 in 12. You may not be able to do much about that issue, but it’s important to understand.
Likewise, if you own shares in certain types of businesses like limited partnerships you may be a greater risk for an audit. Finally, the IRS takes special “interest” in small business owners. Again, there may be nothing you can do about this but it’s important to understand.
Being audited isn’t the end of the world, but it’s not something most people would volunteer for either. Take care to understand the playing field, play it straight when it comes to tax filing and avoid these five audit flags at all costs.