No one likes the idea of being audited, but rest assured, only about 1% of all tax returns filed by individuals are audited. And the simpler the return, the less likely you will be audited. However, your audit odds go up as your income increases or the more complex your tax return becomes.
When it comes to getting selected for an audit, there are ways to stay under the radar. Listed below are red flags that can that can trigger an audit:
- Credits – Taking the Earned Income Credit, Adoption Credit, and the American Opportunity credit can send up a red flag because there are so many qualifications behind these credits. This does not mean you shouldn’t take every credit to which you are entitled, just be careful when filling out the paperwork and double-check your forms before submitting them. Just because you take advantage of these credits doesn’t mean an automatic audit.
- Deductions – High deductions for charitable contributions, employee business expenses, and vehicle expenses, can make the IRS suspicious. If these are legitimate expenses, then you have nothing to fear, just keep good records.
- National Standards and Lifestyle – Deductions that are out of proportion with the income you’ve declared can lead the IRS to suspect unreported income. If you deduct DMV fees of $3,000, property taxes of $15,000 but are showing only $27,000 in income, the IRS is going to wonder how you manage and call for an examination.
- Self-employment – Low or no income and high expenses for self-employment can also raise eyebrows. Showing losses year after year will cause the IRS to think that perhaps you are attempting to write off your hobby, so be sure to keep adequate documentation to support your deductions.
Accuracy is important. Be sure to review every number on your tax return before signing and filing it. Your tax preparer will give you all possible deductions and credits given the information he or she has. To be sure you do not become at risk of an audit, only supply reliable information.