While you cannot fully control whether the IRS audits you come tax season, there are measures you can take in an effort to lower your chances of being audited. It all starts with hiring a reputable tax accountant. If you prefer to file your own taxes, make sure you are diligent and extra careful. But what does this mean? Basically, you should avoid making the following common mistakes and follow these 9 ways to avoid an IRS audit.
Making data entry errors
When you transfer any amount of data from one location to another, you run the risk of improperly copying numbers. Or inaccurately inputting data points, and making mistakes regarding your calculations. It is important to be as specific as possible when adding, subtracting, multiplying, or dividing digits. Instead of rounding numbers, be as exact and as precise as possible.
Failing to report all of your income
The IRS receives its own copies of every income reporting form that you fill out. This is including W-2 forms and Form 1099, as well as alimony-related forms and your K-1 income, which entails any losses or dividends that you accrue as a result of your business or your financial partners. Information pertaining to foreign bank accounts is also accounted for by the IRS.
If you fail to report any of your income sources, you run the risk of being audited by the IRS. This is even if the omission happened by total accident. Whether it’s income from a full-time job or a part-time side hustle, all of the money you earn must be reported.
The IRS often looks at your income from one year to the next. Discrepancies that are spotted will pique the interest of the IRS, which may lead to an audit.
Misrepresenting your deductions
Overestimating how much money you can deduct from what you owe is a dangerous game to play. From charitable deductions and business expenses to home office deductions and other potential tax breaks. Claiming too many deductions can ultimately look like a cause for concern in the eyes of the IRS.
This is usually especially true if your deductions are far greater this year than they were in years prior. Be honest about how much money you’ve donated to charity. Or the size of your home office, and other specifics pertaining to any and all tax deductions that you claim. When possible, obtain and hold on to receipts that you can provide to the IRS. Then, in the event that you are audited as a result of the deductions you are claiming.
If you claim a lot of various deductions when filing your taxes, you are typically automatically at risk of being audited because deductions often draw attention to you. Just make sure that any deductions you claim can be proved with documentation in the event that you are selected for an audit.
Choosing the wrong filing status
It is imperative that you select the proper filing status for yourself and your circumstances. With the help of a reputable tax professional, you can ensure that you are making the right selection. If you change your filing status in a way that is drastically different from your prior filing status, then you might cause heads to turn at the IRS.
For instance, if you recently divorced your spouse but you try to claim head of household or single for the year you were still married, the IRS will likely investigate. There are different filing status options for a reason. Make sure you select the status that is accurate for you.
Falsely claiming dependents
It might seem easy to claim dependents, but there are various checklists that must apply before you can do so. Claiming children that you don’t actually have or saying you have dependents when you only have pets will be viewed as pure deceit. Instead of getting into trouble with the IRS, be honest about your dependents. While honest mistakes can happen, especially in the event of confusion caused by child custody, the IRS is not always forgiving of accidents. The fewer you make and the more you can avoid, the better.
Wrongfully claiming the Earned Income Tax Credit
The Earned Income Tax Credit was put in place with the intention of assisting households that have low income levels. The IRS is adamant about making sure only the households that legitimately qualify are able to take advantage of this credit opportunity. So before you claim the Earned Income Tax Credit, double-check your eligibility with an experienced tax adviser.
Exhibiting strange behavior when self-employed
The IRS keeps a watchful eye on the self-employed because self-employment taxes can be quite complex. If you are self-employed and you either fail to acknowledge that you’ve made a profit or claim that you are not profiting from your self-employment services, then the IRS will be skeptical of the legitimacy of your self-employment.
Reporting drastically different information than your employer
If you happen to be a shareholder in a corporation of any kind, be mindful of the fact that the IRS will likely compare your tax return to the information reported by the corporation. If your information does not line up with theirs, the IRS might investigate to figure out why there are discrepancies between you and the other party.
Keeping inaccurate records
Make sure you maintain accurate records that you can then reference when it comes time to file your taxes each year.
When you are intentional and honest about your taxes, there is nothing to worry about. The odds of you being audited will be slim. But even if you are selected for an audit, the IRS will likely see upon further investigation that there is no reason to be concerned. As always, there is no way to be sure that you’re safe from an audit. But if you are audited by the IRS, try not to panic. Instead, contact us and seek advice from him or her.