Filing taxes is on par with going to the dentist or arguing with the DMV. It’s tedious, time-consuming and potentially expensive. As if fumbling with confusing numbers and complex forms weren’t “taxing enough, submitting your 1040 is even more stressful when you’re worried about an audit.
Understand, there’s nothing inherently sinister about an audit. An audit is simply the Internal Revenue Service double-checking your numbers to make sure there aren’t any discrepancies. If you’re being a good little taxpayer and telling the truth, the whole truth and nothing but the truth, you need not worry. However, people who are consciously cheating the system do have reason to be concerned.
The IRS conducts audits to minimize the “tax gap,” or the difference between what the IRS is owed and what the IRS actually receives. Sometimes audits are random, but the IRS often selects taxpayers based on suspicious activity. As a general rule of thumb, we’d advise against subterfuge. But for those of you worried about an audit this tax season, here are seven of the biggest red flags likely to land you in the hot seat.
1. Making errors
When the IRS starts investigating, “oopsy” isn’t going to cut it. Don’t make mistakes. This applies to anyone and everyone who needs to file taxes. Don’t accidentally write a 3 instead of an 8. Don’t get distracted and forget to include that final zero. Mistakes happen, but make sure you double- and triple-check your numbers if you’re doing your own taxes. You’ll be hit with fines regardless of whether your mistake was intentional. If you’re math is a little shaky, using an automated program or tax professional can help you avoid unfortunate errors. Remember, the IRS has an eye for funny business. Supply the correct information, and you should have no complications.
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2. Failing to include a 1099 or additional income
Easy way to score an audit? Don’t report part of your income. The IRS will be on you like buzzards on a gut wagon. Always include your 1099. Let’s say, for example, you’re employed part time herding cattle for Farmer Jeppe and pick up a little extra cash writing articles for a sheep-shearing publication on a freelance basis. You may be tempted to only submit the W-2 from your cattle work and keep the freelance writing wages on your 1099 under wraps. Well, guess what? The IRS already knows about wages listed on your 1099. It’s only a matter of time before they discover your omission. Report all of your income, including money from bonds, stocks, interest-yielding accounts and the like.
3. Claiming too many charitable donations
If you made significant contributions to charity in 2012, you’re eligible for some well-deserved deductions. Most taxpayers who itemize deductions claim charitable deductions at an average of 3% of their income. This bit of advice is common sense: don’t report false donations. If you don’t have the proper documentation to prove the validity of your contribution, don’t claim it. Pretty simple. Claiming $10,000 in charitable deductions on your $40,000 salary is likely to raise some eyebrows.
4. Reporting too many losses on a Schedule C
This one is for the self-employed. If you are your own boss, you might be tempted to hide income by filing personal expenses as business losses. But before you write off your new ski boots as a business expense, consider the suspicion too many reported losses can arouse. The IRS may begin wonder how your business is staying afloat.
5. Claiming too many business expenses
Along the same lines as reporting too many losses is reporting too many expenses. Anyone who needed to make a purchase to perform work duties in 2012 should know what can and cannot be deducted. To be eligible for a deduction, purchases must be 1) ordinary and 2) necessary to your line of work. A professional artist could claim paint and paintbrushes because such items meet both requirements. A lawyer who paints for fun and does not turn a profit couldn’t claim art supplies as a deduction. The question to ask is: was the purchase absolutely necessary to performing my work duties? Transportation to the office and computer hardware are great examples of typical deductions. Making too many business claims will definitely raise a red flag. As long your expenses are justified, you’re all right. But if you’re making claims you shouldn’t, watch out.
6. Claiming a home office deduction
Home office deductions are rife with fraud. It may be tempting to give yourself undeserved deductions for expenses that don’t technically qualify. The IRS narrowly defines the home office deduction as reserved for people who use part of their home “exclusively and regularly for your trade or business.” That means a home office can qualify if you use it for work and work only. Occasionally answering e-mails on your laptop in front of your 72″ flat screen TV doesn’t qualify your living room as a deductible office space. Only claim a home office deduction if you have set off a section of your home strictly for business purposes. Be honest when you report expenses and measurements.
7. Using nice, neat, round numbers
In all likelihood, the numbers on your 1040 and supporting documents will not be in simple, clean intervals of $100. When making your calculations, be precise and avoid making estimations. If you’re a photographer claiming a new lens as a business expense, it probably did not cost $500. If purchased new, it might have been $499.95 or even $495. An even $500 is somewhat unlikely, and the IRS may ask for proof.
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