Tax audits are some of the scariest things that can happen to an individual or a business owner. These make tax filings extra stressful as you don’t want to make the mistake of piquing the IRS’ interest for an error.
An important thing to note, however, is that IRS audits are relatively rare. According to statistics, only 0.59% of all individual returns were audited in 2018. This is mostly due to the budget cuts in the organization. These numbers promise low likelihood of getting audited but it’s still not very reassuring. Most people would still exercise extreme caution (as they should) in filing their taxes in fear of jail time and financial ruin.
So how do you avoid catching the eye of the tax people? Here are some of the things you should be careful about:
If you want to absolutely avoid any issues with your filing, it’s very important to check and double check the information you’ll provide on your tax return. Even if you’re already working with an accountant or using a reliable tool like H&R Block or Liberty Tax, it’s still important to go through everything once or twice to make sure that everything is right before the submission of the document.
Many might feel like they can slack off when they’re already working with an expert. Unfortunately, in many audit nightmare stories we’ve heard, it’s the accountant’s error that got some people in big messes. Fixing them is hard, too, as appeals can get quite complicated and costly. Many instances involved legal procedures and no one really wants that.
While you double-checking the details on your form will not guarantee that you’ll spot all of the errors, especially if you’re not necessarily an expert in tax filings, it can still be a good way to find minor issues and fix them right away.
Most people put off the preparation of their tax filings because it’s not the most fun thing to do. In fact, in 2018, 14 million people waited until the last minute to file their taxes. While it’s completely understandable to want to delay this chore for as long as possible, it can cause problems later.
If you don’t want to have enough time to check your forms and computations, you might want to work on them before the deadline. Don’t give yourself unnecessary stress over not having enough time to check and recheck your numbers later on. You might end up missing out on something which can get you in trouble.
Specificity of your figures
Preparing tax returns is a tedious chore that it can be very tempting to simplify it further by rounding your figures up or down. Specificity is necessary to be very accurate with your numbers so don’t do it. It may be a pain to deal with a lot of decimals but taking the time to crunch those numbers will help you dodge the IRS for audits.
There are lots and lots of deductions that you can apply to your tax returns. A bit of digging and going down the legal rabbit hole will help you discover more deductibles if you want to further trim down the amount you owe the government.
However, by trying to take advantage of as many deductions as you can, you might also catch the eye of an auditor. While you wouldn’t be breaking laws if you use the deductions correctly, they can still grab the attention of a tax person. Too many deductions will seem fishy, so it can invite an inquiry.
Your different streams of income
This is a no-brainer but it bears repeating: you have to be mindful of multiple streams of income. You need to properly file your tax returns if you have different earning gigs. The IRS is very particular about this and will be on your overlooked earnings. Keep in mind that there are very rare exceptions when it comes to taxes, so you have to be more diligent if you have multiple streams of income.
Expect to fill up several and different types of forms if you earn through different venues.
Your bank activity
Banks are required to inform the IRS if large sums of money move in and out of an account. So if you spent or received a lot of money recently, you should expect some complications on your taxes with it. As a means to prevent fraudulent activities, the IRS and federal government are notified when lots of money is moved about so you should be prepared to justify its origins on your tax returns.
A cash business
If you have a business with lots of cash transactions, there’s a good chance that the IRS will be on you as well. It’s quite discriminatory but the IRS thinks that you’ll easily forget to add the cash payments to your income. This, combined with a lifestyle that doesn’t seem to align with your bills, may prompt the IRS folks to knock on your door.
These are just a few of the things that can trigger audits, so take note of them. If you can avoid them, do so, and skip more hassles that come with tax season.