Luckily, full-scale tax audits are rare. According to the latest IRS update, you only have a 0.6 percent chance of being audited – the lowest rate since 2002.
Still, there are some common mistakes taxpayers make that prompts the IRS to audit your tax returns.
Failing to Report Taxable Income
When it comes to your income, the government has the power to follow your earnings down to a single penny. That’s because tax laws require you and anyone who pays you for whatever reason to report those numbers.
A copy of every form you receive or fill out during tax season, from your W-2s to 1099s, is sent to the IRS. There it passes through their Discrimination Information Function (DIF) computer system, which inspects all tax return forms. If there is an irregularity, a red light goes on, and you will likely be audited.
Additionally, you should keep a record of cash payments, such as cash services, tips, and alimony. If the amount exceeds $600, you must submit a 1099-MISC form and notify the IRS about your earnings.
A Big Change in Income Size
How much you earn has the potential of raising a red flag with IRS. It is especially true if your income is drastically higher or drastically lower than in the previous year. A significant spike in either direction with a similarly high tax return can put you under the radar of Uncle Sam.
In general, people with a six-figure annual income have a higher chance of being audited with one out of every 59 taxpayer return statements being revised. Conversely, as much as 3.25 percent of taxpayers who report no adjusted gross income found themselves interviewed in 2016.
According to IRS, you have the least chance of being audited if your earnings are in the area between $50,000 and $75,000.
Claiming a Lot of Tax Deductions
The IRS usually has an idea of what kind of tax deduction each person can receive based on their income. When taxpayers claim deductions beyond their means, such as donating 80% of total income to charity or attributing a similar amount to mortgage interest rates, it seems highly improbable and warrants an audit.
A similarly unrealistic claim is requesting a tax deduction for 100% business use of a vehicle, mainly if you don’t keep a travel log on your dashboard or you don’t own a second car.
However, you can claim a lot of tax deductions in case you are a sole proprietor, depending on your profession. All these business expenses are added together on a Schedule C form to determine taxable income. For example, it allows professionals such as truck drivers to receive deductions for mileage and meals as they spend 30 percent of their income on these things.
Here at Golden Tax Relief, we offer specialized tax services that can help you advise, plan and provide solutions to all your tax needs.