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There's nothing more fear-inspiring than the prospect of an IRS tax audit. Approximately one million taxpayers are subjected to an IRS audit each year, and while some individuals are chosen at random, the vast majority of audits are the result of an inconsistency or error on individual tax returns. While there is no way to prevent being chosen at random, it is possible to avoid certain red flag items that may trigger an IRS audit.
Income Reporting
Unreported income is the number one factor that can result in an IRS audit. Any income you receive must be reported to the IRS, whether it's from your job, gambling, a side hobby, or the sale of any securities you might own. If an employer or other entity issues you with a W-2, 1099, or other income tax reporting form, then it is also being issued to the IRS. If there is a discrepancy between how much you claim to have earned and how much the IRS knows you have earned, this can potentially trigger an audit.
Fluctuations in Income
Similar to not reporting income, reporting wide fluctuations in income from one year to the next can also raise a red flag. For example, if you reported $25,000 in income one year and $85,000 the next, the IRS may question why your income has suddenly increased. If your income is statistically lower than those who work in the same occupation as you, or if you make over $100,000 annually, your chances of being audited may increase.
Numerous Deductions
By all means, you should always take advantage of any deductions you are entitled. The problem with IRS deductions is that oftentimes, people tend to get creative in categorizing certain expenses as deductions and this can result in an audit. For instance, a common audit trigger is the deduction of a home office. The IRS has specific rules regarding what qualifies as a home office and you must be sure you meet the requirements before claiming a home office deduction. Another common trigger occurs with charitable contribution deductions. If you make $40,000 per year and claim $15,000 in charitable contributions, this will make the IRS suspicious.
Dependents and Spousal Support.
There are a number of ways people can decrease their tax liability and one is by claiming dependents. However, you should be aware that if you're divorced, only one parent may claim a child as a dependent. This is usually the custodial parent unless he or she signs a waiver allowing the other parent to claim the dependent. If you receive spousal support such as alimony, the IRS can check the amount of support reported vs. the amount of support claimed as a deduction by the other party.
Mathematical Errors
Mathematical errors are common and if a significant mathematical discrepancy is apparent, then the IRS will likely want to double-check the information and find the source of the discrepancy. Tax-preparation software can reduce the probability of incurring mathematical errors but it's always best to carefully double-check your figures. Similarly, using round numbers rather than raw figures can also trigger an audit so be cautious of using estimated figures in your tax reporting.
While no one wants to be audited by the IRS, you can reduce the chances that you will become the target of an audit by knowing what mistakes to avoid in preparing your tax return. The key to avoiding common red flag triggers is to be honest and accurate in your tax reporting and to double-check your return carefully for errors before submitting it.
