What raises eyebrows at the Internal Revenue Service?
Are you worried about being audited? The fear may be overblown, as only 0.6% of taxpayers had their federal returns examined in 2017 (the most recent information available). That same year, only 4.3% of taxpayers with gross income before deductions of over $1 million had their returns scrutinized. Some of this is down to low staffing at the Internal Revenue Service (I.R.S.). In 2016, the I.R.S. audited 0.7% of returns, part of an overall downward trend. Still, no one likes extra stress courtesy of the I.R.S. Let’s look at some red flags that might get you extra I.R.S. scrutiny. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.1,2
Filing a paper return. Why is filing an electronic return better than using the old-fashioned paper form? It turns out that paper returns get more attention as the information is transferred through the I.R.S. as your information is recorded. Because most electronic filing options check your math, a paper return has more chance of featuring errors. More I.R.S. scrutiny leaves the door open for more I.R.S. questions.1,2
Taxable income of $1 million or more. If you are reporting that sort of income, you may want to look into hiring a professional. Taxpayers who work with an accountant raise far fewer red flags than people going the do-it-yourself route.1
Huge deductions. Is your money-losing small business venture truthfully just a hobby? Did you really donate $6,000 worth of office supplies to a charity, and do you have the receipts to back that up? The I.R.S. routinely checks returns for deductions that seem outlandish.1
Living large. Does the I.R.S. peruse social media? Yes, it does, as we all do. The I.R.S. has done good detective work for years; its investigators know to check out DMV and employment records to get a better picture of an errant taxpayer. Today, photos and posts on Facebook and Twitter can telegraph potentially valuable nuggets of information, particularly about young taxpayers who have come into wealth that their returns don’t seem to show.
Keep it simple. File early and accurately. Keep your receipts and other pertinent papers on file. Spend a little time each month arranging your financial matters, so that taxes can remain a relatively painless process.
1 – investors.com/etfs-and-funds/personal-finance/tax-audit-avoid-irs/ [2/19/19]
2 – financial-planning.com/news/what-are-a-clients-chances-of-an-irs-audit [1/29/18]