Here are some ways to avoid unnecessary tax audits by the Internal Revenue Service, although some Americans will try to cheat the system this year, it becomes a serious matter when they are caught. In fact, some information on a return can raise the red flag.
Some tax payers go too far in searching for tax advantages. Perhaps they take a deduction that they aren’t eligible for, or claim a few extra dollars on a charitable donation. If the IRS begins to suspect that a tax return isn’t entirely truthful, the filer might be in for an audit.
There are ways to avoid an audit and the red flags that can prompt a second look from the IRS, and what to do if you’re targeted by the government.
Few Americans are subject to a second look from the IRS. In fact, audits are one of the few times that having an average salary is an advantage.
“Only about 1.1 percent of people who file a 1040 [the most common tax return] for the 2010 tax year were audited … [or] about 1.5 million,” according to Michael Rozbruch, founder and CEO of Tax Resolution Services, “However, the audit rate is 12.5 percent for people earning $1 million or more in 2010. This is up by 100 percent from 2009 levels! The IRS is aggressively going after this segment of the population.”
Most audits are often triggered by the kind and amount of deductions taken. These include charitable contributions, employee business expenses, and vehicle expenses. Business and rental schedules with high deductions but no reported income are also common audit triggers.
Karen Reed, director of communications at TaxResouces Incorporated, says the IRS is often curious about tax returns that don’t appear to support the lifestyle of the person filing the return. “In such cases, the IRS will scour all of the taxpayer’s bank accounts looking for unreported income,” she says.
Lastly, simple errors in data input can catch the attention of an IRS inspector.
“In a recent audit case, for example, the taxpayer added a couple of extra digits to his state income tax withholding and reported a $600,000 deduction instead of $6,000. He had completed his return on the Web and never reviewed it before filing it,” Reed says. “It’s important to check every item on your tax return. In reporting income and withholding, a mistake in just one digit can lead to disastrous results.”
Both Reed and Rozbruch recommend contacting an expert if an audit is ordered.