Published March 27, 2013
As the April 15 tax deadline quickly approaches, filers are getting down to the wire to complete and submit their returns.
The tax code and filing process can be complicated, and a minor mistake, overlooked filing requirement or missing income can lead to having an IRS agent at the front door for an audit.
An audit by the IRS reviews an organization's or individual's accounts and financial information to make sure information is reported correctly and that the amount of tax reported is accurate.
Although tax payers may fear going to their mailboxes in the weeks following the tax deadline, getting audited is less common than one might think. According to a study by TurboTax, the IRS received 187 million returns and audited 1.7 million in 2010, with only 1% of the majority of individual earners having been audited. (http://blog.turbotax.intuit.com/2012/03/19/audit-misconceptions/)
“It’s usually [because] they don’t show enough income to support a lifestyle or they get this huge refund that they don’t normally get and that should be a flag,” says Alan Pinck, enrolled agent and owner of A. Pinck and Associates. “If nothing has really changed in your scenario and you’re used to getting $1000 and this year you’re getting $15,000, there might be something wrong with that return.”
To help keep the tax agent at bay, here are four common mistakes that can land taxpayers in hot water and how to avoid them.
Mistake No.1 Misstating Filing Status
It's important to review all legal filing status options. Married tax payers who live together only have two legal ways to file: either file a married joint or a married separate return.
“Filing single or filing two separate head of household returns with multiple dependent children is simply not legal and runs the risk of future audit adjustments resulting in potentially significant adjustments in tax liabilities, penalties and interest,” says Dan Shapiro, certified public accountant and senior tax preparer at R&G Brenner Income Tax.
Filers can mistake their status particularly in cases of divorce where one parent claims head of household without having their children live with them for more than six months of the year, says enrolled agent Christa Aiani.
“A lot of people don’t understand that people who are divorced by the end of the tax year must file single unless they qualify for head of household filing status.”
Mistake No.2: Deductions that Don’t Add Up
Taxpayers must keep income levels in mind when itemizing large deductions to avoid having their return flagged, particularly when it comes to self-employed and business deductions, warns Pinck.
“Say you have $20,000 of gross income on your return and you have $24,000 of car and truck expenses: with the standard mileage rate of 50 cents a mile, that means that you drove 48,000 miles to make $20,000 and that just doesn’t make sense for most businesses,” he says. “It could be possible but chances are that number is overstated.”
Beginning in 2013, taxpayers can expect that itemized deductions for those with adjusted gross income above $300,000 ($275,000 if the filing status is head of household, $250,000 if single, $150,000 if married filing separately) may be reduced, says Aiani.
“This means that taxpayers with adjusted gross income higher than the threshold limits may have their itemized deductions amount reduced, causing a bigger tax bill than expected.”
Mistake No.3: Not Properly Documenting Charitable Deductions
Taxpayers claiming large charitable deductions compared to their income level without providing proof to back it up can find themselves in trouble with the IRS.
A donor cannot claim a tax deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or letter) showing the name of the charity, the date of the contribution, and the amount of the contribution, says Aiani.
“Remember that you have to itemize in order to be able to deduct charitable donations,” she says.
Mistake No.4: Taking the Home Office Deduction Without Meeting Requirements
Being self-employed can increase taxpayers’ chances of being audited, particularly in claiming a home office deduction, according to enrolled agent Dennis Grogan, and senior tax preparer at R&G Brenner Income Tax.
“Beware using your home as an office: the requirements are stringent, the benefit is small, and the chances of audit are huge,” he says.
The two main requirements are that the part of the home claimed as office space must be used regularly and exclusively for business and that it is the principal place of business, explains Aiani.
“However, if you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may still qualify for a home office deduction,” she says. “A licensed tax professional, such as an enrolled agent, can help you decide if you can take the deduction or not.”