Know what tax documents you'll need upfront Get started. Learn what education credits and deductions you qualify for and claim them on your tax return Get started. The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice.
Skip To Main Content. Staying on the right side of the IRS While audits are rare, most Americans would probably like to avoid them altogether.
Check your figures One of the most common red flags for auditors — erroneous data entry — is also one of the most preventable. A good practice is to wait for all your income reports, bank and investment statements and other applicable financial paperwork to arrive before starting your tax return. Correctly reporting dependents and exemptions, as well as ensuring that the numbers match, is also important. The IRS's automated system will easily detect discrepancies, and it won't be obvious whether or not a discrepancy is accidental or on purpose.
In general, you should be prepared to look an auditor in the eye and support any number you claimed on your return. Self-employed filers, for example, should have receipts for every business deduction they claim. High earners typically take more deductions, such as for charitable contributions, and are more at risk of being audited. Taxpayers filing Schedule C are more likely to be questioned.
If you don't own a house or have children and you make a modest income, there is virtually no chance you will be audited, unless you've made a mistake on your tax return or your deductions are abnormal. Realistic deductions Unusual or unrealistic itemized deductions, either for individuals or small business owners, may raise a red flag for auditors. Corporations , S and partnerships are audited less than individuals — with an audit rate of 1 in 0. In , the IRS audited only 1 in every 0.
The IRS utilizes its auditing resources to hone in on taxpayers that are most likely to be traditionally non-compliant, which would include small businesses, international taxpayers, high-wealth taxpayers, and possible Earned Income Tax Credit fraud schemes.
Wage earners with traceable income reported on traditional Forms W-2 are less likely to be scrutinized. Two types of taxpayers are more likely to draw the attention of the IRS: the rich and the poor, according to IRS data of audits by income range. The least likely group to get audited? Their audit rate, at about 0. This group likely receives W2s from their employers, data that the IRS can verify, and relies on the standard deduction rather than itemizing, which cuts out the potential for fudging some deductions.
But fraud also exists, such as when families game the system by splitting up children between married parents who then both file as head of household to maximize credits, the IRS says. With the reduction in IRS staff, all income groups have seen a decline in their audit rates, although the rich have enjoyed a sharper reduction than the poor.
This puts a focus on high-income earners. Conversely, you stand a higher chance of being audited if you manage to wipe out all or most of your income through the use of tax deductions. Only 1. These taxpayers were audited the least in Your employer must issue a W-2 for your earnings and submit a copy to the IRS as well.
You can even expect that you and the agency will receive a Form W-2G if you win big at the casino or hit the lottery. All these information forms are fed into DIF, so up goes the flag if your tax return fails to include any of these sources of income. You still have to pay taxes on it. Alimony is an exception as of Jan. Spouses receiving alimony no longer have to report it and pay taxes on that income. The idea is to thwart illegal activities. The IRS will be notified if you make a large deposit over this amount.
You should be prepared to show how and why you received that money if you file a tax return. These reporting rules for banking and financial institutions impose time limits as well. The IRS says you're "structuring" your deposit in this case, and there are rules against this, too. The IRS expects that taxpayers will live within their means.
It can trigger an audit if you're spending and claiming tax deductions for a significant portion of your income. These expenses are tallied up on Schedule C and are deducted from your earnings to determine your taxable income from your business. DIF is on the lookout for deductions that are above the norm for various professions.
Have you noticed those occupational codes that appear on your tax return? The IRS uses those to make sure that your travel expenditures are in line with others who report those same codes. You'll most likely get a second look from the IRS if you've claimed a lot more than the average for your profession. Presumably, you drove to do personal errands at some point.
The IRS knows that taxpayers who claim home office deductions often get the rules wrong, so there are potentially some additional tax dollars to be had here. The ironclad rule is that you must use your home office area for business, and only business. You—and your family members—literally cannot do anything else in that space. Review IRS Publication if you're planning to claim a deduction for a home office. You'll want to get this one right.
Businesses that fall into this category include salons, restaurants, bars, car washes, and taxi services, according to the IRS.
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