As April 15 looms, people are kissing their tax-deductible offspring or digging through desk drawers to find receipts from the prior year. The specter that hangs over this annual race to file your 1040 is the threat that the IRS will look askance at your tax claims.
The good news: Last year the IRS audited 1.4 million people, which represented about 1% of total individual tax payers.
The better news if you’re wealthy: The IRS audited just over 24% of Americans with gross adjusted income of $10 million or more, down from 30% in 2011. The bad news if you’re broke: The IRS nearly tripled the number of audits for people reporting no income last year, compared with 2011.
Here are the red flags that experts — and the IRS itself – says puts you at audit risk:
Math mistakes – If the figures don’t add up, you’re asking for trouble. Just like speeding through a mathematics test in school, if you racing through the forms to meet the April 15 deadline without building in time to double-check your work, you may pay for it – literally.
The IRS found 2.6 million math errors on individual income tax returns last year. Most common areas that were miscalculated: total taxes, number or amount of exemptions, deductions, the Earned Income Tax Credit, First-Time Homebuyer Credit and the Child Tax Credit.
Missing signature or ID information – The chances for careless mistakes don’t end with the math. Forgetting to sign the documents or misstating basic information like your Social Security number raises the risk not only of an audit, but also losing tax exemptions.
“Make sure you’ve entered the correct Social Security numbers for yourself, your spouse and any dependents. Your Earned Income Tax Credit (EITC) and other dependent-related tax benefits could be at risk if you enter an incorrect Social Security number for your dependent child,” writes Lisa Greene-Lewis, lead CPA at TurboTax.
Not reporting all your income – If you’ve done work on the side for $400 or more, or work on a freelance basis, you need to make sure you’re reporting all your income. Filing a W-2 from your principal employers but not filing a 1099 or other forms for additional income can spell trouble because the sources of that income are likely reporting those expenses to the IRS.
“I’ve had clients tell me that since they didn’t get a 1099, they didn’t think they were required to report the income. Not so,” writes Bonnie Lee, author of “Taxpertise.” “Employers, banks, brokerage firms, payers of independent contractors all file documents with the IRS and send the same documents – Forms 1099, W2, 1098, K-1, etc., to taxpayers. If you neglect to report any of the data on these forms, or report an amount different than what is on the form, the IRS picks up on it.
Running a small cash business – The IRS is wary of taxpayers who pass off hobbies – like weekend carpentry or the dog show competitive circuit – as a self-employed business loss. “Business losses for the first one or two years are common when you are self-employed or a sole proprietor,” according to TaxBrain. “But if you are still claiming losses three years later after being in business for five years, the IRS will begin to wonder if you really own a business or if you are just writing off a hobby to get more deductions.”
“If your business runs mostly on cash or cash incentives — you’re a taxi driver, car washer, work in a hair salon or bar — you’re more likely to get audited,” writes Daryl Paranada of the Motley Fool.
Deducting home, auto for business use – Want to claim your home office as a business expense? Home computer? Personal car? You can, if it’s legitimate – but be ready to defend it if the IRS comes knocking.
“Lots of individuals are under the misconception that they can deduct their home office even if they have another office to work in. The rule is you can only deduct a home office if you don’t have another office available to you,” Leif Novie, principal at Morrison, Brown, Argiz & Farra, told the Chicago Tribune. Similarly, trying to claim an automobile as exclusively used for business is a risk.
Excessive generosity – If the amount of charitable donations is outsized to your income, the IRS will take note, experts say.
“That doesn’t make (a big donation) illegitimate, but you more likely than not will stand out and be audited,” said tax accountant Andrew Porter. “It’s all about documentation.”
“The agency takes a close look at taxpayers who say they donated $500 or just under, since anyone who donates more than that amount must file Form 8283,” writes Kimberly Palmer of U.S. News and World Report.
Missing deadline or not filing at all – Surest way to raise hackles at the IRS. “Many times, taxpayers may simply choose not to file their returns out of a sense of hopelessness at their tax situation,” according to tax preparer Wall & Associates. “This inaction and inattention will not make their problems go away, though; it will only make them worse.”
Illustration by Brian Yee