The odds are low that the Internal Revenue Services (IRS) will audit an individual’s tax return. However, data shows that IRS tax audit rates dramatically rise as income increases and audit rates are significantly higher for U.S. expats (that live and work abroad). While there’s comfort in knowing that you’re less likely to be audited, it pays to prioritize and focus on settling your taxes to steer clear of tax audit mistakes that may call the IRS’s attention.
It’s always best to stay on the good side of the IRS. This article will break down the common red flags for tax audits and how you can reduce your chances of getting the dreaded 1040 audit. Let’s get started.
1. Making math errors
This may sound basic and simple, but the IRS checks if the forms you submitted add up, so it would be best to double- or triple-check your math. They gather copies of your tax forms from banks, financial institutions, and employers. A simple miscalculation or wrong amount entered can sound the alarms in the IRS.
When filling out your tax return or when your accountant has completed it, do a final review. The IRS evaluates which accounts to audit based on discrepancies on your report, so it’s crucial that what you report on your government-issued forms and the calculations in them match on your tax return.
2. Forgetting the signature
It’s a surprising mistake, but it’s one that many people still are guilty of making when mailing a paper tax return. Missing signatures on tax returns guarantee a probe and thorough assessment of all your forms. The IRS will have to check all forms under your name to see if there’s anything else you may have forgotten to include or missing signatures in your records. This may also call for another careful evaluation of your calculations.
A simple mistake like this happens, and it can be a hassle to both you and the agency. Make it a habit to double-check your tax returns and ensure that everything is accurate and complete before you submit them.
3. Underreporting income
You are required to report all of your income. Failure to do so will result in facing, either in person or through the mail, an IRS agent. If you receive a CP20000 letter, that means the IRS has identified that the income or payment information on their file doesn’t match the information you reported on your tax return.
Whether it’s income from work or the sale of an asset, you must present them on your report because things can get serious when you don’t report or underreport and get caught. It’s best to stay on the IRS’ safe side.
4. Skipping deduction details
Select the deductions you will declare carefully; unwarranted and suspicious amounts without a corresponding receipt or proof of an actual expenditure can raise the auditor’s eyebrows. Don’t overestimate your business and itemized deductions, such as meals, travel, and donations. The IRS is always wary of suspicious numbers that don’t make sense, so document them with the mindset that the IRS will scrutinize them.
Moreover, make sure that you have the proper documentation to back up any deductions you’re claiming. If your deductions are significantly higher, the IRS could ask for proof of your expenses. You must keep a good record of the deductions you claim on your return.
5. Not including donations
Do you often donate? If so, save the receipts and use charitable donations as deductions from your income. Some people overlook that even donations qualify as deductions for tax returns.
6. Mishandling personal records
Protection from a tax audit ultimately comes down to how you maintain your individual tax records, especially if you’re a business owner or freelancer with numerous cash transactions. Without sufficient documents to back up the information you present in your tax returns, you have a greater chance of being audited and a nearly 100% likelihood that such deductions will be disallowed during the audit process.
It’s best practice to be prepared and armed with all the information they might need when you get audited than to be sorry later on. In fact, this is a requirement from both the IRS and all state tax authorities. It’s also common for an individual to record a personal expense as a business expense and vice versa, so keep an eye on that.
Over to You
People see tax audits and the IRS as daunting, but that only proves that tax audits are real and taxpayers should take them seriously. If you’re worried about miscalculation issues and you want to ensure you’re doing your taxes right, it’s always a good idea to work with experts or a tax service partner who can guarantee that your numbers are correct.
For tax filing, tax resolution, tax compliance, tax planning, or any tax concerns, you can depend on Tax Samaritan. Get the best in class service for all your tax-related needs.