Just thinking about getting audited by the IRS is enough to induce a mini-panic attack in most people, and for good reason. Audits are time consuming and disruptive, and because you never budgeted time or money for an audit, chances are it’s going to be an unwelcomed and unexpected surprise.
Before we talk about how to go about avoiding an IRS investigation, let’s talk about some of the tax filing red flags the IRS vigilantly monitors in order to choose their targets.
Are you in a targeted group?
It may sound a little unfair, but the IRS lawfully discriminates against people making more than $100,000 by targeting these earners with significantly higher scrutiny. Some sources suggest that people claiming more than $1 million face a 10% chance of having their return audited, while those claiming less than $200,000 have a 0.78% chance of being audited.1 According to some studies, households making less than $100,000 may have an audit likelihood as low as 0.06%.2
Some common red flags include…
- Use of Earned Income Tax Credit (EITC) or a mortgage deduction that is abnormally high for your income.3 If you legitimately qualify for deductions and have the evidence to prove it there is no reason not to claim it, but the IRS is always on the lookout for abnormal and unrealistic deductions.5
- Charitable donations more than $250, especially if it’s a non-cash donation valued at more than $500.3
- Does the income on your return filings match the income on your 1099s and W-2s? The IRS receives copies of these and cross checks for consistency.1
- Are you a self-employed Schedule-C filer? Business losses, especially if they are recurring for several years in a row, could raise the suspicion of IRS auditors. Even if you’re not operating at a loss, an excessive number of expense deductions may also appear suspicious to the IRS.4
- Schedule-C filers are also allowed to use their home office as a deduction – up to 300 square feet at $5 per square foot. Claiming a deduction beyond this amount may throw up red flags.3
What can you do to avoid IRS audits?
Accuracy is the best defense.
One of the most common pieces of advice you’ll hear regarding tax filings is double and even triple checking your math to ensure accuracy.
Tens of thousands of audits occur every year to unsuspecting filers not because of dishonesty on their part but simple math errors. Hiring a CPA who is up to date and certified to prepare taxes can help mitigate these risks.
In addition to helping you avoid errors in calculations, CPAs can also provide invaluable guidance regarding deductions you should be claiming and help you avoid those for which you may not be eligible.
In the event a CPA makes a mistake on your return, the IRS will still view you as the liable party. That being said, your CPA – either explicitly or implicitly – has a duty to competently complete your return. If they breached that duty and it resulted in material damages, you can likely hold them legally accountable for those damages.
Many reputable CPAs have clear contractual guarantees which state they will reimburse their clients for fees, interests or other monetary penalties incurred due to mistakes on their part. 6
The benefits of e-filing.
Even the IRS aggressively advocates for e-filing. According to their numbers, the error rate for traditional paper returns is approximately 21%, whereas the errors for e-filings is just 0.5%.5 In addition to improved accuracy and the clear step-by-step directions afforded by many modern tax filing software options, e-filers also tend to receive their refunds more quickly as there isn’t an excessive volume of paperwork for the IRS to input and analyze.7
Have you been audited?
If you have already received the news that the IRS is auditing you then it may be in your best interest to consult with an attorney. Fargo tax attorney Stephen Baird has extensive experience in the realm of taxation and was even awarded the Michigan Bar Section of Taxation’s “Excellence in the Study of Taxation” award.
Knowledgeable legal assistance through this disruptive process may help restore a bit of your peace of mind, and Mr. Baird would be happy to help.