Tax audits are the nightmare we can all do without. No one wants the IRS pouring over every tiny detail of their tax return.
But what triggers an audit and how can you avoid one? Turbo Tax, maker of the popular tax preparation software, dishes on three of the top red flags for audits:
Not reporting all your income. Any institution that pays you income, for example, a brokerage or IRA account, will report that income to the IRS by issuing you a Form 1099. A copy of that form goes to the IRS, so it’s important to report that same exact amount on your return. Most people don’t mean to under-report income; they just forget about small accounts or misplace the 1099. If there’s a mismatch between what you report and what the IRS thinks you received, their computer is likely to spot the discrepancy and you’ll probably receive a formal letter from them asking for an explanation.
Making too much money. OK, maybe this is one problem we would all love to have, but the more you earn, the more likely you’ll be subject to an audit. Make over $200,000 and your odds of audit quadruple. Rake in over $1 million and the odds triple again. But if you make under $200,000, like most Americans, you have only a 1% probability of being audited. People with higher incomes have more complex tax returns and present more attractive targets to the IRS. If the IRS scores on an audit of someone with six- or seven-figure income, odds are it can capture more in taxes and penalties.
Blurred lines can get you into trouble. If you take someone out to dinner, is it business or personal? How about the fancy car, the trip to Cancun, or the box seats at the sports event? Business owners deduct expenses every day, but when they blur the lines between business and personal, things can get messy. Turbo Tax says the IRS knows what “typical” expenses are for each profession. If you exceed those guidelines by too much, you might just invite an audit. Keep good records and distinguish between business and personal to help steer clear of trouble.