How to avoid a tax audit
Tax season isn't known as the most enjoyable time of the year. But avoiding a tax audit can definitely make the experience less painful.
No one enjoys tax day. Filling out all those forms and checking those figures is a drag. But there's one thing worse than filling out your income taxes: an IRS audit.
Here's the secret, though: There's no magic formula for avoiding an IRS audit. The only surefire way to never receive one of those ominous IRS letters is to be honest when completing your taxes. (See also: 5 Important Tax Changes for 2016)
"Any tax professional who gives you a list of audit triggers is selling snake oil," said Stewart Patton with U.S. Tax Services. "They are simply trying to trump up their own personal experience into something universal, trying to position themselves as a unique soothsayer among mere mortals."
Your Tax Return Tells a Story — Make It Honest
Sam Brotman, a tax attorney with San Diego's Brotman Law, explains it like this: "Every tax return tells a story," he said. "The IRS audits people when that story does not match up."
Brotman said that most filers believe that taking too many deductions will trigger an audit. But that's not necessarily true. Brotman said instead that who gets audited is based mainly on statistics.
Your tax return contains what Brotman says is a "treasure trove" of information about who you are, what you do, and how you earn a living. The IRS then compares the information on your return with other people in your area who share similar attributes.
The people who get audited are those that differ significantly from the norms, Brotman said. He gives this example: If you and all of your neighbors live in a neighborhood where everyone makes the same approximate level of income except for one or two people, the IRS is more likely to audit those two outliers.
"The biggest tip that I can give is to be honest about your deductions and your income," Brotman said. "People who try to game the system are often unclear on how the IRS' statistical methods for auditing work and often end up getting audited anyway."
Avoid Basic Mistakes
That being said, there are certain mistakes that will increase your odds of an IRS audit. Venar Aya, a tax attorney with Southfield, Michigan's Ayar Law Group, said that those filers who make mathematical errors on their returns are more likely to get hit with an audit.
"All of your taxes are run through a computer, so if you botched the math somewhere along the line, it's going to trigger a red flag," Ayar said.
Ayar recommends that filers triple check their numbers before sending off their taxes.
You'll also increase your chances of an audit if you try to under-report your income, Ayar said. Remember, the companies that you work for will report what they've paid you to the IRS. If you try to hide that income, the IRS will find out, and it won't be happy.
"Part of the IRS' job is making sure you pay what you're supposed to," Ayar said. "To be perfectly blunt, when it comes to filing your taxes, don't screw around."
Ayar also pointed to charitable donations as a possible trouble area. It is good to donate to charity, and you should claim your charitable donations as deductions to help ease your tax burden, Ayar said. But you must accurately report the amount you donated. Trying to claim larger contributions than you actually made could raise the suspicions of the IRS.
"When you make a donation that is abnormally big in comparison to your income, that will raise some eyebrows," Ayar said.
Business Expenses Are Tricky
Deductions associated with running a business either full-time or part-time from your home can also make the IRS suspicious, said Dave Du Val, vice president of consumer advocacy at Citrus Heights, California-based TaxAudit.com.
Yes, you want to deduct legitimate business expenses if you run a business from your home. But if you deduct too much, and if you tend to only deduct "fun" expenses such as a new digital camera, high-end smartphone, or ultra-expensive laptop computer, you just might trigger an IRS audit.
Du Val recommends that consumers be careful, too, when deducting miles, airline flights, or hotels that they are claiming as business expenses. It all comes down to whether your business is truly a business and not a hobby, and whether the purchases you are deducting are actually business expenses.
For instance, you can't really claim that trip to Disney World as a business expense if during your seven-day stay you only had one business meeting. And if you spent the other six days with your family in the Magic Kingdom? That's really not an appropriate business deduction.
"Ask yourself, is your business really a business according to the Internal Revenue Code?" Du Val asked. "If you have a business with little to no income for which you have been reporting a loss year after year, review the IRS' guidelines for determining if an activity is a business or hobby. Maybe it's time to stop reporting that hobby as a business."
This article first appeared at Wise Bread.
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