There are a few common things that can reliably stress out the average person: visiting the DMV, getting summoned for jury duty, and preparing taxes.
After calculating your taxes, you not only find out how much you may have to pay the government, but you also have to ensure that complicated tax returns are done correctly. Otherwise, you run the risk of being audited.
The good news is that audits are actually infrequent, despite the misconception that the IRS is knocking down every other taxpayer’s door. In fact, statistics demonstrate that the agency is conducting fewer and fewer audits, largely due to budget cuts.
But don’t think this makes you immune from an audit. We have put together this resource to make taxpayers aware of some common IRS audit triggers in 2019.
Grossly Overexaggerated or Underexaggerated Claims
The IRS utilizes a computer system known as the Discriminant Information Function (DIF) to weed through a high volume of tax returns. So a computer, rather than a human, is the one sifting through the bulk of tax returns.
The DIF is intended to pick up obvious red flags on tax returns. For example, if someone only earned $50,000 in a year yet claims they donated $30,000 to charity for a tax write-off, the DIF is bound to pick up on it.
You should not attempt to trick the system. Avoid grossly overexaggerating or underexaggerating earnings, deductions, credits, or business expenses.
Higher Earners Are Scrutinized
The reality is, the more you earn, the more likely you are to get audited. The IRS is not going to waste time on an audit unless there is a reasonable chance that the taxpayer actually owes additional taxes.
Middle-of-the-road earners are often ignored, while those who earn $200,000 a year or more are often the ones targeted. Taxpayers with an income of over $1 million are particularly prone to audits, which is even more true if the tax return includes a high level of reported tax deductions and credits.
Discrepancies Between Earnings
If you are a standard earner, you report your income to the IRS. Your employer also submits a W-2 or 1099 that explains their version of what you earned for the year. The same applies to banks reporting interest or dividend income from accounts like an IRA.
An audit is much more likely if there is a discrepancy between what the employer reported and what you reported. While you may not want to report the minutiae of your income, if the IRS considers it taxable, it is best to play along with the rules.
When you work as a sole proprietor, freelancer, independent contractor, or however else you want to define it, you are studied more closely by the IRS as a self-employed individual. Why? There are a variety of reasons, but the primary one is self-employed workers can claim a lot of business expenses as tax deductions.
Though these deductions are intended to assist self-employed workers since they are heavily taxed, some try to take advantage of their tax breaks. The DIF computer system is on the lookout for deductions that are above the norm for income earned.
Self-employed workers should exercise caution when writing off mileage, meals, office supplies, and other business expenses. Yes, you are entitled to deduct what you needed, but abusing the privilege will likely lead to the IRS taking a closer look at your tax return.
Claiming an Abundance of Itemized Deductions
The IRS may target those who claim a large number of itemized deductions, the same way they target self-employed workers who claim too many deductions.
Though more taxpayers are prone to take the standard deduction rather than the itemized one, there are certain situations where it is beneficial to itemize. However, reporting an inflated interest on a mortgage or excessive charitable donations could make you a suspect to the IRS.
Claiming the Earned Income Tax Credit (EITC)
Though earned income tax credit (EITC) is a benefit to many taxpayers who qualify, there is a habitual amount of abuse that goes on with the EITC. Therefore, if you claim the credit, the IRS may study your return more closely.
Part of the problem with EITC is the government refunds taxpayers who are owed more for the deduction than the taxes they owe. Naturally, they don’t want to just hand over the money without inquiring further, so an audit could occur.
Withdrawing Retirement Funds
In the event of an emergency or other financial hardship, you would think you would be entitled to the money you have set aside for retirement. However, most retirement accounts have tax penalties for withdrawing funds before you are technically allowed to do so.
Those who withdraw these funds early can find themselves being audited by the IRS because they misreported them on a return. The agency reports that nearly half of all individuals who withdraw retirement funds early report it on tax returns incorrectly.
Levy & Associates Provides Tax Education
We want to help you or your small business avoid an audit. Contact us today for a free initial consultation. We’ll provide best practices for staying away from an audit and inform you of solutions if you do find yourself dealing with one. Levy & Associates is available at 800-TAX-LEVY, or visit www.levytaxhelp.com.