Many of us this time of year share a common nightmare: a tax audit. This is despite the fact that the chances of finding that dreaded notice in the mail are slim—the majority of tax filers—those who earn under $1 million a year—have a less than 2 percent chance of being audited. However, just because you’re not the 1 percent doesn’t mean that you can slip under the IRS radar. There are red flags on your tax filing that can greatly increase your chances of an audit.
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First, be careful when it comes to your deductions. The IRS looks for higher-than-average deductions in each category as a signal that things may not be right. The most common deductions that stand out as potential problems include charitable deductions that are too high for your income, over-the-top home office deductions, and egregious entertainment deductions, such as meals and gifts. These deduction categories are all legitimate so make sure you back all your claims up with documentation.
How you make your money can also make you more likely to be audited. Two types of earners keep the IRS on its toes—the self-employed and those paid in cash. If you’re your own boss, you most likely function also as your own accountant, which means to the IRS that you have many opportunities to make mistakes, knowingly or not. And if you’re paid in cash, the IRS knows that you can more easily underreport what you earn. If you’re honest about your own accounting you can avoid that audit or if audited, escape heavy fines and fees.
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Selling online has become easier than ever but don’t forget, if you earn extra income from selling items you own and make a profit, make sure you report your income. Keep in mind that your selling or payment processing service, such as eBay or PayPal, is reporting sales and the IRS will notice if this income is missing on your tax return.
Claiming losses from a rental property, investments or a past time can bring on extra IRS attention. Losses can be difficult to qualify as a deduction so make sure that what you’re claiming falls clearly into the legitimate loss-zone.
And last, making mistakes with math or inputting numbers can definitely mean an extra look at your taxes. Double check your work and you may avoid that dreaded audit.
Got a tax tip to share or a question? Tweet @carmenwongulric, #OnFile.