With the Internal Revenue Service armed with an additional $80 billion in funding, many taxpayers are worried this tax season about being audited.
Regardless of whether that is an objective of the IRS, tax experts agree there are four red flags — one a “dead giveaway” — that may trigger a possible discrepancy in the system or catch the eye of an auditor, CBNC reports.
1.) Round Numbers
If any of your tax breaks is a round number, the IRS will think you are estimating a figure. Use accurate numbers when claiming tax breaks, experts counsel.
For example, “if you have a small store claiming $5,000 in advertising, $3,000 in legal expenses and $2,000 for support, the IRS knows you’re winging it,” says Preeti Shah, a certified financial planner at Enlight Financial of Hamilton, New Jersey.
This is the biggest “dead giveaway” for the IRS, Shah says.
2.) Missing Numbers
All your income needs to be accounted for on your return, or the IRS may seek you out for an audit, says John Apisa, a CPA and partner at PKF O’Connor Davies LLP in Cranford, New Jersey.
Your income from companies and financial institutions will automatically be reported electronically to the IRS, so your return needs to match all of those figures, exactly, Apisa says.
That means, you can’t skip Form 1099-NEC for contract work you thought was negligible or Form 1099-B for even minor investment earnings, he says.
If you don’t have all of the paperwork or documentation you will need to file, be sure to get them before filing your tax return.
“You have to be careful, even with the simple stuff,” Apisa says.
3.) Excessive Tax Breaks
If the tax breaks you are claiming are a significant percentage of your income, the IRS will be suspicious.
“For example, if you have $90,000 of earnings with $60,000 in charitable deductions, that may set off an alarm in the IRS system,” Apisa says.
4.) Earned Income Tax Credit
The earned income tax credit (EITC), which are refundable tax credits generally awarded to low- to middle-income workers, are still something that the IRS looks carefully at for accuracy, Apisa says.
“That’s usually one of the ones that gets scrutinized more,” he says.
In fact, a report from the Treasury Inspector General for Tax Administration found that between fiscal years 2015 and 2019, audits for taxpayers making $1 million or more dropped significantly, by 75%. However, they declined by only 33% for filers claiming the EITC.
The Bottom Line
The bottom line is, keep receipts for all transactions you need to report to the IRS, as well as returns, for seven years, as the IRS recommends, says Karla Dennis, founder of Karla Dennis and Associates, an accounting firm in La Palma, California.
“People are scared to death of the IRS,” Dennis says. “They don’t understand how the system works, and so, they’re extremely fearful of audits.”
The best defense is copious records and detailed knowledge of your income, spending and investments, she says:
“Document, document, document.”
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