Less than 4 out of every 1000 tax returns submitted to the IRS in 2022 was audited. That’s not even one-half of one percent. But the thought of being audited still strikes fear in many people. If you did nothing wrong, you should not worry about an audit.
An audit doesn’t necessarily mean you did something wrong on your tax return or that the IRS believes your return was inaccurate. A certain number of returns are randomly selected every year, and some are triggered when the IRS compares your return to similar returns. They are a routine practice of the IRS. Still, getting audited can be stressful, so we thought we’d share some information that may reduce your stress level if you are being audited this year.
Red Flags That Can Trigger an Audit
Some things more easily trigger an audit than others. Five of these red flags are:
Mistakes happen, but they are not an excuse to avoid an audit. 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. Using good tax preparation software or, even better, hiring a tax preparer can help you avoid math errors that lead to an IRS audit.
Failing to report some income
Perhaps the easiest way to draw an audit is to forget to report part of your income. Whether your earnings are reported on a W-2 form or Form 1099, the IRS already knows how much you made. And failing to report income is a much bigger issue than a math error – but both are serious.
Claiming too many charitable donations
If you made significant contributions to charity, you’re eligible for some well-deserved deductions. But if you don’t have the proper documentation to prove the validity of your contribution, don’t claim it.
Deducting too many expenses
Reporting too many expenses is another red flag. Don’t try to sneak personal expenses in with business expenses. To qualify as a deduction, purchases must be 1) ordinary and 2) necessary to your business.
Using nice, neat, round numbers
Numbers are not nice, neat multiples of 10 or 100. When calculating and reporting numbers on your tax form, round to the nearest dollar, and avoid making estimations.
What Should You Do If You’re Audited?
Most Audits are done through the mail. You won’t need to appear at an IRS location or speak directly with an auditor in many cases. Most of the time, when the IRS starts an audit, they will ask you to explain or verify something simple on your return.
During an audit, the IRS will ask you for information and documents that explain your position on your tax return. It’s important to provide the information just as the IRS requests it. If you have a licensed tax pro handling the audit, give them the facts and documentation, and they will work with the IRS.
By far, the best way to handle an audit is to complete your return as honestly and accurately as possible. If you are tempted to underreport income or overreport deductions to reduce your tax burden, that’s a good sign you should be working with a Certified Tax Planner to help ensure you legally reduce your taxes. We cannot guarantee you won’t get audited if you work with us, but our plans are developed and aligned with the IRS regulations.
Want to sleep easier every year after you file your tax returns? Talk to one of our Certified Tax Planners. Not sure if this is right for you? Call us at 973-940-0175 or schedule a complimentary 15-minute call here.