4 Tax Mistakes That Could Lead to an Audit

By Maurie Backman Markets Fool.com

If there's one thing tax filers fear more than owing money to the IRS, it's getting audited by the IRS. Though your chances of getting audited are statistically pretty slim from the start, you can lower your odds even further by avoiding these major mistakes.

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1. Math errors

There's nothing like a glaring math error to make the IRS take a second look at your taxes. And while you'd think most of us would be smart enough to bust out our calculators when preparing our taxes, that doesn't always happen. In 2014, the IRS identified almost 2.3 million math errors from the previous year's returns. Filing your taxes electronically can help you avoid falling victim to an honest but problematic error. The IRS says that the error rate for paper tax returns is as high as 21%, but it's less than 1% for electronically filed returns.

2. Failing to report income

Any time you make money, whether it's payment for a freelance gig or interest from your savings account, you're required to pay taxes on your earnings. Failing to come clean about that extra income could land you in serious hot water with the IRS. Typically, you'll receive a 1099 form in the mail from every bank or financial institution that houses your money or investments. Similarly, if a company or entity pays you $600 or more as a freelance contractor, you'll get a 1099 form summarizing your earnings. What you should also know is that the IRS gets a copy of every 1099 you receive, so if you omit any of your side income, you stand a good chance of getting caught. (Note that you're still required to report earnings under that $600 threshold as well.)

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3. Taking too high of a deduction for charitable contributions

Being charitable is a good thing, but you don't want to come off as too generous on your return, because it could raise a red flag. The IRS collects data on how much charity the typical household donates based on income. If your contributions for the year grossly exceed that figure, you may be suspected of lying in order to inflate your tax deductions.

The following table shows how much the average American donated to charity in 2014, broken down by income level:

Adjusted Gross Income (AGI)

Average Deduction for Donations

% of AGI

Under $25,000

$1,874

12.3%

$25,000-$50,000

$2,594

6.8%

$50,000-$75,000

$2,970

4.8%

$75,000-$100,000

$3,356

3.8%

$100,000-$200,000

$4,130

3%

$200,000-$500,000

$7,424

2.6%

$500,000-$1,000,000

$18,615

2.8%

$1,000,000-$2,000,000

$43,944

3.2%

$2,000,000 or more

$382,953

5.6%

DATA SOURCE: IRS.

So if you earn $80,000 a year and take a $3,000 deduction for charitable contributions, it shouldn't come off as unusual to the IRS, because that amount falls within the normal range. But if your adjusted gross income is $80,000 a year and you take a $10,000 donation deduction, the IRS is more likely to flag your return.

4. Abusing your Schedule C

If you're self-employed, you'll need to submit a Schedule C summarizing your earnings or losses for the year. You're allowed to list and deduct all eligible business expenses when calculating your total profit or loss, but if you push the limits too far and claim a large number of questionable deductions, then your return might land in an auditor's lap. Now this isn't to say that you shouldn't take all the legitimate deductions you're eligible for. But before claiming a business expense, you'll need make sure it's valid andhave sufficient documentation backing it up. So if, for example, you're an independent IT consultant and you try deducting computer equipment, it will probably fly. But if you deduct dozens of business meals, then it might prompt the IRS to take a closer look.

Remember that less than 1% of tax returns are audited every year, and if you earn between $25,000 and $199,999, your chances of getting picked are even lower. Furthermore, audits typically aren't the nerve-wracking experience they're made out to be on TV. Over 75% of tax audits are conducted by mail, and they don't always work out in favor of the IRS, either. In fact, in 2015, the IRS gave out $1.1 billion in refunds to taxpayers who had their returns audited.

Of course, most of us would still rather avoid an audit in the first place. And if you're careful about filing your return and avoid these key mistakes, you'll reduce your chances of winding up on that exclusive yet undesirable IRS list.

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