Of the 157 million individual tax returns filed last year, the IRS audited 509,917 of them. That means your odds of being audited by the IRS is roughly .3%. Here are some tips to avoid landing on the losing side of that percentage.
1. Do NOT Underreport Your Income
Copies of your W-2s and 1099 forms are sent directly to the IRS by your employers. Your failure to report any of this income will raise suspicion with the IRS, as will failure to accurately report interest earned on savings or capital gains on any investments.
2. Do NOT Overstate Business Losses or Expenses
If you are taking business deductions that don't fit your occupation, it is going to raise red flags with the IRS. If your business has not shown a profit multiple years in a row or is not reporting income from payment apps that are typically accepted in your industry, that will also raise a red flag for an audit.
The IRS analyzes behaviors across industries to come up with what they consider to be occupational norms. If it costs you three times as much to operate your business as the national average, that is also an invitation for an audit.
3. Do NOT Lie About Foreign Accounts
According to the Foreign Account Tax Compliance Act, you must report foreign accounts with $50,000 or more on Form 8938. If you don't this could trigger an audit.
4. Do Double Check Your Calculations
Simple math errors could send your return for manual review, and inadvertently bring other issues on your return into light.
5. Do NOT file for Deductions, Status, or Credits without the Documents to Support
Filing for deductions or credits without having the documentation to meet the qualifications of those deductions or credits is an invitation for an audit. An example of this would be attempting to reduce your tax bill by filing for the Child Tax Credit without having children, or as Head of Household without having a dependent.
6. Do NOT Overstate Charitable Contributions
The IRS wants you to make donations to charities, but they also know what types these contributions typically look like for each income bracket - if you are claiming donations outside of what the IRS considers to be the norm for your income level, this could trigger an audit. Always keep receipts for any charitable contributions or donations being claimed.
7. Do Report Gambling Wins
Failure to report gambling/lotto winnings, especially casino winnings, can trigger an IRS audit because these winnings are reported to Uncle Sam by casinos, race tracks, and other gaming venues.
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I’m Kristin, the PWCPA PC Customer Success Specialist. For more information about this topic, or any other, you can always reach me through our customer ticketing system.