Being selected for an IRS audit isn’t simply a matter of chance. Certain factors can make your tax return stand out from the rest.
“The IRS pays more attention to some returns than others, so it’s important to understand the factors that may elevate the likelihood that auditors take an interest in your situation,” says J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA.
If you’re audited, don’t be surprised if you have to make additional payments for invalid deductions or expenses. It’s easy to make mistakes, so be sure to keep all your documentation in case you get audited.
Here are eight potential red flags that could alert the IRS — and some survival tips if you come under scrutiny.
1. High incomes. According to a recent IRS report on its enforcement activity, your chance of being audited substantially increases once your income crosses $200,000.
2. Large itemized deductions. Deduct every penny you’re entitled to — but realize that if your itemized tax deductions are bigger than the IRS’ target range for people at your income level, your return may get a second look.
3. Home offices. You can only take a home office deduction if you meet all of the qualifications, including regularly and exclusively using part of your home as your principal place of business. For example, if your office doubles as the kids’ playroom, you’re generally unable to deduct it. For details, see IRS Publication 587.
4. Missing investment income. You know the IRS Form 1099 that financial services companies send you that summarizes your interest and dividends for the year? The IRS also gets that information. Make sure your return properly includes this information.
5. Incomplete returns. If your return is missing a few pieces, the IRS may wonder what else you forgot. Although you still must enter the correct information, a tax-preparation service that calculates figures you enter may help you avoid certain clerical errors that raise auditors’ eyebrows.
6. Business losses. In a tough economy, business losses are more common — but they’re still something the IRS likes to double-check. Make sure your expenses are legitimate and eligible to be deducted and that your business isn’t just a thinly disguised hobby.
7. Charitable deductions. You’ll need a canceled check or dated receipt for any cash contributions, and contributions of $250 or more require written acknowledgement from the charity. If you made a noncash contribution valued at more than $5,000, you’ll need an expert appraisal to back up your claim.
8. Medical expenses. For 2012, you can deduct these costs only to the extent they’re greater than 7.5% of your adjusted gross income, and it’s important to keep detailed records. Also remember you can’t deduct the cost of over-the-counter medicine, health club dues or most cosmetic surgeries. For 2013, the percent-of-AGI hurdle for those 64 and younger is climbing to 10%.
If you’re doubtful about the decisions you’re making when completing and filing your tax return, consider hiring a professional. Spending some money for expert guidance today could help you avoid paying increased taxes and penalties tomorrow.
If you get a letter from the IRS, don’t take it personally. “The government just wants to make sure your return is accurate,” says Montanaro. “However, it does mean it’s time to make sure you have all of your documentation and supporting records in order.”
The IRS conducts audits in three ways:
By mail. You’ll be required to mail a form or additional information to the IRS.
At an IRS facility. Typically, you’ll bring your receipts, records and other documents to substantiate what’s on your tax return.
At your home or business. An auditor visits your home or business to verify your return.
To get through an audit smoothly consider following these common-sense rules:
Consider hiring help. You can be represented by an attorney who has experience in IRS audits and processes, a CPA or a federally authorized enrolled agent or tax practitioner.
Know your rights. Before your audit, read IRS Publication 1 “Your Rights as a Taxpayer.”
Be honest. Lying to the IRS can trigger heavy fines and even jail time.
Get organized. You’ll generally have more credibility if you can answer questions and produce what’s asked of you. If you need time to get your act together, you or your representative may typically request a postponement.
Stick to the topic. Whether you’re answering a question or responding to a request for records, only give the IRS what it requests.
Take notes. Keep track of the examiner’s questions and your answers.
Be courteous. Don’t be hostile. If you think you’re being treated unfairly, share your feelings with the examiner’s supervisor.
Consider an appeal. If you disagree with the auditor’s findings, you might first try talking to a supervisor. You also can send a protest letter to the IRS Office of Appeals within 30 days of receiving the report.
This content is provided courtesy of USAA.