Common Red Flags That Will Prompt the IRS to Pull Your Income Tax Return Aside for an Audit
You can never completely avoid the possibility of being audited, but you can make it less likely
You've probably seen ads guaranteeing that certain things will ensure you won't get audited by the Internal Revenue Service (IRS) at tax time. Want to know a secret? You can never completely avoid the possibility of an audit. The overall number of taxpayers chosen for an audit is usually less than one percent. But there are steps you can take to make an income tax audit even less likely.
How Does IRS Decide to Audit?
While some taxpayers get chosen for an audit completely by random chance, some factors are taken into consideration by the IRS. Those factors include:
- Whether taxpayer forms match information on their returns;
- Significant changes from the previous tax years, such as $20,000 in charitable donations when none are usually taken;
- Whether tax ID numbers match those of any other taxpayers reporting information about you (such as dependents, babysitters, or employers); and
- Whether your numbers are similar to those of other taxpayers in your demographic.
- Always Check Your Match Before Filing Your Return
- Try Not To Stand Out
- Double Check Social Security Numbers
- If You're A Student, Check With Your Parents
- Get All Required Forms
- Choose Deductions and Credits Wisely
- Have Reportable Income
- But Don't Make Too Much Money
- Don't Guess About Your Numbers
- Fix a Mistake If You Find One After Filing
Surprisingly, math errors continue to be one of the top errors reported by the IRS every year. But this is also because it's one of the easiest things to catch since the math is one of the first things the agency checks. The math on the first two pages of your tax return, for example, are the most important since an error here can mean serious errors, intentional or otherwise, elsewhere.
The IRS looks for outliers, such as unusual patterns, when deciding which returns to audit. It's rare, for example, for an individual to claim more in charitable donations than he/she has in taxable income. But it does happen, and it's perfectly fine so long as you have records to support your claims. So if you want to reduce your chances of being audited, don't become an outlier. Some items that could raise a red flag, such as the number of charitable contributions or deductions, might make more financial sense to claim in a later year.
Another common mistake is to enter the wrong Social Security Number for yourself or others on your tax return, such as children and other dependents. If a Social Security Number comes back to an individual claimed on another taxpayer's return, or if the number does not exist, you'll definitely raise red flags. So make sure these numbers are correct before submitting. Not only will you reduce your chances of an audit, you'll avoid delays.
College students often run into tax issues when their parents have unexpectedly claimed them as dependents on their returns. The result is a duplicate claim, leading the IRS to pull both the student's and parent's tax return. So if you can claim or be claimed on someone's return, check with that person to see who will be making the claim.
Make sure that you've got all of your forms before your file, including any that you need to report income from a side job (1099-MISC), interest (1099-INT), or dividends (1099-INT). If the IRS can't match the information from your tax return to a form, it may result in an audit. This can happen if you report a number that differs from what a form shows.
There are a lot of tax credits and tax deductions available, so it's easy to think you're eligible when in fact some other factor means you aren't eligible. If you have far too many deductions and credits than the average taxpayer or if you take uncommon or unusual credits, you can raise red flags. Make sure the credits and deductions claimed can actually be claimed and have the information to back it up. An example of something that will raise concerns is claiming a child care credit and not reporting a child as a dependent. Or if you make $50,000 per year, the IRS will likely pull your return aside if you report $25,000 in mortgage interest deductions.
If your tax deductions are consistently more than your taxable income, or if you report a loss in your business every year, it's a red flag to the IRS that you don't appear to be able to support yourself. So make sure you have reportable income and, more importantly, report it. The IRS has an idea of how much you make, anyway, based upon the information your employer sends to them. So if your reported income is less, you'll definitely show up on the radar.
The IRS will also pay attention if you suddenly seem to be making too much money, especially if your prior year returns show significantly less income. Making too much money isn't a crime so long as it's legal and properly reported. But those with higher incomes are usually more likely to be audited. This really applies if you accidentally report too much income. So make sure your income amounts are accurate. The IRS seems to pay more attention to people who make more than $200,000 in income per year.
You might hit a perfectly round number every once in a while, but these numbers are rare. So if your numbers seem to be all dollars and no cents, you're going to show up on the radar. You are allowed to round numbers to the nearest dollar, but certainly not to the nearest hundred or thousand. To keep suspicion low, enter exact figures.
It's inconvenient to file an amended return, especially having to explain that you made a mistake. But admitting to a mistake and correcting it will decrease your chances of an audit, especially if you want to reduce the risk that the IRS will pull your previous returns for examination. Fix any errors with an amended return as soon as possible.