The IRS doesn’t have the time or the resources to audit everyone. In fact, only a small percentage of of tax returns are audited each year. Since there are always some returns that are randomly chosen, there is no guaranteed way to avoid an audit. But there are ways to avoid red flags that will cause your return to be questioned and chosen for a closer examination.
Some tips that can reduce your chances of being reviewed:
Inaccurate W-2 or 1099 reporting
The IRS receives a copy of every W-2 and 1099. They have a record of the amount of everyone’s total income before ever receiving the tax return. Not reporting all the money earned is like asking for an audit. Pay close attention when filing your tax forms and make sure to list your income from all sources.
Sometimes the IRS has a little help singling out someone to audit. They call them “whistle blowers”. The Internal Revenue Service will often pay or add extra money to a refund in return for information about someone illegally not filing a return or being dishonest about the amount of income that’s reported. To be safe, always make sure to file taxes when required and be honest when entering the amounts.
Large charitable deductions
Claiming deductions that are large in proportion to income gets the attention of the IRS quickly. Since there are so many rules surrounding this topic, one should always have some sort of proof. If the charitable amount is under two hundred and fifty dollars, a cancelled check will be sufficient enough. For anything over that, a letter from the charity is required.
Red flags can be raised for several reasons when it comes to a Schedule C. The cost of expenses may be higher for one business than for most others, the total of expenses may be large compared to the total amount of income, and even not claiming any expenses with an average amount of income are just a few reasons the IRS may want to further check a return. By maintaining good records and keeping all bills and receipts, an inquiry can be settled quickly instead of becoming a full blown audit.
Another reason Schedule C filers draw more attention from the IRS is when a taxpayer is filing a cash business which is the only income on the return qualifying them to claim the earned income tax credit.
Earned income credit
The majority of the returns audited by the IRS were those claiming the Income Credit. Answer all the questions before filing for the credit and make sure all the required qualifications are met. Although most people correctly file it, there are those who try to obtain it dishonestly.
Just remember, an audit doesn’t necessarily mean something on the return is wrong; it just means there is something the IRS wants to get a closer look at. By being honest, well organized, and keeping good records there shouldn’t be any reason to worry.