Avoiding an IRS Audit

Taxpayers all across America are busy gathering data for the annual gala called tax filing day! Well, April 15 is not the kind of party that many of us are looking forward to unless you are anticipating a big refund. When it comes to filing your tax return, timeliness and accuracy are very important…timeliness in order to avoid penalties and interest; accuracy to help avoid an IRS audit. This year the tax filing deadline is April 18th or you can postpone filing for up to six months by filing IRS Form 4868. Thousands of tax returns get audited every year; some as part of a random review but many thousands of others are because the tax return got ‘flagged’ by the IRS computer system. Here are the top reasons returns get flagged:
  • Simple math errors. One of the most common errors that trips up taxpayers is math that doesn’t add up. Don’t double check, triple-check your math. An even better idea is to have someone else check your math. Sometimes, a different set of eyes can discover the obvious. Also make certain you complete all the sections of the return that apply to you. An incomplete return is as bad as a math error.
  • Not including all reportable income. Another mistake people will often make is to fail to report all their income such as interest income from a banking account. It’s easy to forget about an account when filling out your return. It may be a very small amount of interest but realize that these institutions, when reporting to you are also reporting to the IRS and their system is set up ‘match’ the institution’s report with your tax return. It’s no secret that much of America’s economy is ‘off the books’…where people are paid in cash for work performed which is never reported. Be aware that one of the tools the IRS uses to catch these people is through their ‘whistle-blower’ program whereby someone such as an ex-employee, ex-spouse or neighbor turns you in and receives a 15% to 30% reward based on what the IRS determines you owe. One footnote: if you whistle-blow on someone and get a reward, don’t forget to report it!
  • Your ‘numbers’ fall out of the normal range. The IRS computers are set to flag numbers that statistically deviate significantly from the averages. Examples include unusually higher than average charitable deductions compared to income; much lower income than the average for your profession; drastic changes in income from one year to the next; unusually high itemized deductions. Even making more money than average increases your likelihood of audit. For example, you’re five times more likely to be audited if you make more than $100,000 per year.
  • Entrepreneur creativity. Owning your own business opens up hundreds of additional tax deduction possibilities and the IRS is all too aware that small business owners like to ‘push the envelope’ on tax deductions. Beware of audit flags for home-office deductions, excessive entertainment deductions, putting family members on the payroll, or unlikely business deductions. Do you really think the IRS will allow a deduction for Pebbles as a guard-dog for your home-office? 
None of this is to suggest that you shouldn’t take every legitimate deduction possible, but realize that if you do get audited, there is no substitute for great recordkeeping.