Everybody wants to get a hefty refund check from the Internal Revenue Service or pay the lowest amount of tax with their return, but you don’t want to do something that is going to increase the likelihood of an audit.
Studies show that up to 12% of all tax filers admit to cheating on their taxes. These bad seeds could cause trouble for those people that play by the rules because Mark Everson, IRS Commissioner, has made it a priority to go after those people that try to shortchange the government. A large write off her and a questionable deduction there could set off some red flags and result in an audit.
While approximately 1% of all taxpayers are audited each year, the average middle income taxpayer with a simple, straightforward return usually doesn’t have much to worry about.
In order to avoid an audit, it’s a good idea to understand what an audit flag is. Tax returns that are processed by the IRS are done by computer. The IRS computers are programmed to look for any entry that is unusual or strays from the statistical norms. When an item appears that is outside the normal range it might be flagged, thus increasing the odds of an audit. When a return is flagged it will be reviewed manually by an IRS employee in order to determine if an audit is in order. Keep in mind, an audit flag doesn’t necessarily mean you’re going to be audited, but it does mean the IRS is going to look closely at your return.
Sloppy or incomplete returns – Missing information and math errors may prompt further scrutiny. When a computer is unable to make sense out what is filed, a human is going to look for mistakes. This is an excellent reason to file your returns electronically. A software program will catch errors that you might miss.
Income that’s suspiciously low – If you are earning much less that other people in the same profession, this is going to raise a flag.
Income that’s suspiciously high – People that earn more than $100,000 annually are 5 times more likely to be audited.
Drastic income changes – An income that fluctuates may be an indication of something that went unreported. The IRS knows that the majority of people do no have wild swings in their income.
Excessive charitable contributions – The IRS uses statistics to determine the average amount of charitable contributions for each income level. If the average contribution for your income level is $2000 and you claim $6000, this may set off a flag. Be sure to save all receipts.
These are a few of the common factors that trigger audit flags. You can reduce the chance of setting of these flags by using a good tax return software program or a professional when filing your return.
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