Filing your income taxes can be a stressful process, especially if you opt to go it alone. There's nothing like the feeling of submitting that return and knowing you don't have to think about taxes for at least another year.
Continue Reading Below
Or do you?
If you're among the unlucky few who get targeted for an IRS audit, you may have a bit more work on your hands than you bargained for.
It could happen to you -- but it probably won'tLet's get one thing straight: Your chances of getting audited in the first place are pretty slim. For the past three years, less than 1% of filers have gotten audited. In fact, in 2014, only 0.86% of total tax returns made the dreaded audit list. You can thank IRS budget cuts for that one, as well as an increase in individual federal returns filed.
Of course, just because the odds of getting audited are low doesn't mean the IRS won't wind up picking you. There are certain factors that can increase your chances of getting audited, and in some cases, you can do your part to avoid them.
Making too much moneyWhile the IRS purportedly doesn't hold a grudge against higher earners, it's hard to ignore the fact that for 2014, filers with incomes of $200,000 or higher had an audit rate of 2.71%, which translates into one out of every 37 returns -- yikes. Those who earned $1 million or more were even more likely to be targeted, with one out of every 13 returns getting audited. By contrast, among those earning less than $200,000, only 0.78% of returns (one out of every 128) were audited during 2014.
Failing to report incomeMaybe you're a freelancer and you just forgot to include a couple of your 1099s. Or maybe you meant to copy the correct figure from your W2 and accidentally missed a zero. Whatever the case, failing to properly report your income is a good way to buy yourself a ticket to audit-land. The IRS gets copies of all W2s and 1099s, and when your numbers don't match their records, the tax man may demand an explanation.
Abusing a Schedule CIf you're self-employed or operate a small business, this nifty little schedule allows you to deduct certain expenses that substantially reduce your taxable income. But some people tend to take advantage of those deductions excessively. If you run a Web consulting business out of your home, then taking deductions for things like office equipment and marketing costs is probably kosher. But try deducting too many non-essential expenses like "business meals," and you might raise a red flag. If you want to avoid an audit, don't go overboard on claiming deductions. Or, to put it another way, make sure every deduction you claim is 100% legitimate.
Being too charitableIt's nice to give money to charity, but if the total amount you're deducting seems grossly disproportionate to your income, the IRS might ask questions. This especially holds true if you're claiming a major deduction in non-cash donations. While there are some truly generous spirits out there, it's unusual for someone with a $40,000 income, for example, to be able to swing $12,000 in charitable donations. On the other hand, $1,000 in donations at that income level looks a lot less suspect. You deserve a tax break for being charitable, but make sure the amount you report is accurate. Remember, too, that if the combined value of your non-cash donations (such as furniture, old clothing, and the like) exceeds the $500 mark, you'll need to file Form 8283 as per IRS rules.
Don't panic if you're on the listJust because you get word that the IRS has picked you for an audit doesn't mean that all is lost. Most of the time, all you need to do is provide additional documentation to support the numbers on your return. Besides, in some cases, getting audited can actually be a good thing. In 2014, the IRS determined that over 38,000 individual filers had paid too muchin taxes and sent them refunds accordingly. Of course, most people who are targeted for audits don't, and shouldn't, count on that happening, but as long as you follow the rules and limit your deductions to legitimate ones only, there's no need to panic if you do happen to be the target of an audit.
The article Are You at Risk of an IRS Audit? originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
Continue Reading Below