Don't Fall for These 5 Tax Audit Myths

By Markets Fool.com

IRS agents are not the suit-wearing boogeymen we make them out to be.

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As if filing your taxes weren't stressful enough, there's always the frightening prospect that an IRS agent will raise an eyebrow at your return and decide to take a closer look at your finances. Yes, it's the dreaded tax audit, which can send the most levelheaded Americans into an all-out panic.

Let's get something straight: While an audit is far from a pleasure cruise, it definitely doesn't deserve the fear it commands. In many cases, getting audited just means you have to dig up some extra documentation, submit it to the IRS, and call it a day. Furthermore, over the past three years, less than 1% of tax filers have been audited, which means that the chances it will happen to you are pretty low.

There are a number of other tax audit myths floating around that could lead you to either let your guard down or work yourself up into a frenzy for no good reason. Let's bust five of these myths here and now.

1. Doing my own taxes means I'm more likely to get audited
Not true. If your taxes are simple and straightforward, and you're capable of following directions and copying the right numbers onto your return (or entering the right figures into your tax software), then there's no reason to think that by doing your own taxes, you'll increase your risk of an audit. In a limited study by the U.S. Government Accountability Office, only two out of 19 professional tax-preparers calculated the correct refund amounts for their clients.If your situation doesn't warrant the help or cost of an accountant, then don't hire one for the sole purpose of lowering your audit risk.

Keep in mind, however, that math errors can happen to smart people. If you're going to file your taxes solo, you're better off doing so electronically. According to the IRS, the error rate for a paper return is 21%, whereas less than 1% of electronically filed tax returns contain errors.

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2. I won't get audited as long as I use an accountant
Again, false. While an accountant can perhaps help you avoid making errors on your return, accountants are human beings, too. And if your return is loaded with questionable deductions, the fact that an accountant prepared it won't automatically get you off the hook. In fact, even if your accountant signs off on your taxes, if you're audited and found to owe money, you'll be responsible for paying it.

Of course, the benefit to using an accountant is that you may get some free built-in audit support if you manage to make the IRS' list. However, while some accountants will represent you in the event of an audit, that extra support might cost you extra.

3. I don't make enough money to get audited
Actually, in 2014, the audit rate for those reporting between $1 and $24,999 in income was almost double the rate for those reporting $25,000 to $99,999. Being a low earner does not get you a get-out-of-audit card. In fact, making no money at all increases your chances of getting audited significantly. Over 5% of filers who reported no income in 2014 got audited, which is more than five times the audit rate of the overall population.

Returns by Income

Percent of Total Returns

Percent Audited in 2014

All returns

100%

0.86%

No adjusted gross income

1.83%

5.26%

$1 to $24,999

39.08%

0.93%

$25,000 to $49,999

23.32%

0.54%

$50,000 to $74,999

13.12%

0.53%

$75,000 to $99,999

8.33%

0.52%

$100,000 to $199,999

10.70%

0.65%

$200,000 to $499,999

2.87%

1.75%

$500,000 to $1 million

0.48%

3.62%

$1 million to $5 million

0.24%

6.21%

$5 million to $10 million

0.02%

10.53%

Over $10 million

0.01%

16.22%

Data source: IRS.

4. I'm guaranteed to get audited because I make a lot of money
Higher earners are more likely to get audited than those earning between $25,000 and $99,999. That's especially true for anyone earning over $1 million. In 2014, over 6% of filers earning between $1 million and $5 million got audited, while over 10% of those earning $5 million to $10 million met the same fate. And among those who reported over $10 million in income, more than 16% made the audit list. However, just because you make a lot of money doesn't mean an audit is a given. Play by the rules, and there's a good chance you'll be among the vast majority of taxpayers who come away perfectly unscathed.

5. I'm self-employed, so I might as well just wait for the auditors to come knocking
Some freelancers and self-employed individuals tend to go a little crazy with deductions or under-report their income, whether accidentally or intentionally. If you're one of them, then yes, you may be putting yourself at higher risk of an audit. However, if you limit yourself to legitimate deductions and make sure to report every penny you earn, then there's no reason to assume that you'll make the IRS' naughty list.

While there are certain factors that could increase your chances of an audit, the IRS also selects some returns at random, which means that even if you hire an accountant, file a simple return, earn a middling amount of money, you could still make the list. If this happens, don't panic. Just be sure to save all of your paperwork and documentation along the way, because you never know when you might need it to defend your return.

The article Don't Fall for These 5 Tax Audit Myths originally appeared on Fool.com.

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