Tax Audit triggers
With financial success comes respect, envy, luxury living and an increase in the odds that the United States Internal Revenue Service (IRS) will audit your return.
Of all the things that can trigger a tax audit, making more than $200,000 per year is the most common. Of all tax returns filed in 2010 and 2011, around one percent of filers had audits. But, for those making over $200,000 per year that number jumped to 3.7 percent – that means audits for one of every 27 returns in this group.
In 2012, overall 0.94 percent of all returns had audits and most of these audits happened through the mail.
So, the odds increase exponentially as you earn more money. But, if you have not done anything questionable, an audit is an annoyance at worst. Since it would be foolish to suppress your earnings to avoid an audit, following are some tips about things on your tax return that piqué the interest of the IRS and trigger an audit.
Three Big IRS Audit Triggers
Not reporting all Income
Your employer issues you a W-2 and sends a copy to the IRS. Reports of other income you earn are on form 1099, which goes to you and the IRS. The IRS does not match your reported income on your tax return with these forms by workers – computers do the matching and they are good. The computer flags returns where there is a mismatch in income reports and the computer generates a bill. However, it also scores your return using a top-secret formula. If you earn a certain score you then you receive an audit notice. Mismatched income earns several points towards an audit.
Big Deductions for Charitable Donations
It is laudable to give donations to charities, even the federal government believes in it. But, the IRS may want you to prove it. Over the years, they have calculated the average donations for whatever your income level is. So, if you exceed the average your return becomes of interest to the IRS. To avoid triggering an audit, attach documentation to your return. These documents should include:
Make sure to keep supporting documents for cash and property you made during the tax year.
If you donated a conservation easement, it is likely that the IRS will contact you.
Meals, Travel and Entertainment for Business Deductions
If you are self-employed, you know the value of the deductions available to you on Schedule C. But, for experienced IRS agents who know that at times the self-employed claim excessive deductions, Schedule C is a cornucopia of information.
High deduction for meals, travel, and entertainment (MTE) set off sirens of potential abuse, especially if the deductions are out of line with the business. IRS agents scrutinize records looking for the wrongful taking of personal meals or other items that fail to fulfil strict requirements for substantiation. Meals and entertain deductions need detailed documentation that includes the cost, who was there, and what was the business purpose of the meal or meeting. Receipts must document all expenses over $75 for hotels.
If the IRS audits your MTE expenses and you do not have adequate documentation, get ready to pay the IRS back taxes with a penalty.
Keeping copious records and having your taxes prepared by a professional are good ways to avoid inadvertently triggering an audit.
Sources: https://www.mint.com/blog/planning/6-tax-audit-triggers-to-avoid-0113/, http://money.msn.com/tax-tips/post.aspx?post=9563ea68-b39c-49b5-b2bd-bd55d2a99c1f, http://www.dailyfinance.com/2013/03/19/irs-audit-triggers-six-red-flags/#!slide=977363
Add comment