You have likely heard about tax audits, and you may even know someone who has had their tax files audited by the IRS. What you may not know is why certain returns are selected for an audit, and how you can avoid the mistakes that raise red flags.
Some returns are selected based on an IRS statistical formula for random screening. Others are audited because they contain certain mistakes. The Pennsylvania Institute of Certified Public Accountants compiled this brief list of red flags that could trigger an audit if they apply to you.
- Incorrect Social Security number. Make sure you clearly write or carefully type your Social Security number. Even one incorrect number can earn you a letter from the IRS.
- Misreporting income. Double check that your income on your Form W-2 and Form 1099 match the reported income on your return. Call a CPA if you don’t understand a form.
- Unusually high charitable deductions. Claiming a charitable donation that is well above average for your income range, or failing to file the proper form for a noncash donation, may trigger an audit. Keep all charitable donation evidence on file.
- Claiming a different amount for your alimony deduction or alimony income than your ex-spouse. This is easy pickings. You must report the Social Security number of your ex-spouse when you report your alimony deduction.
- Unusually high unreimbursed employee expenses. You should certainly claim what you are entitled to, but keep all receipts in case the IRS asks.
- Negative gross profit and/or negative net income. If you report cost of goods sold higher than income on your small business, the IRS may want to know why. If you report regular losses on a Schedule C, the IRS may also get curious and ask you to prove that it is, indeed, a business.
- Inconsistent dependency exemptions. If you and a former spouse (or you and your college-age child) both try to take a dependency exemption for the same child, you will get a letter from the IRS, and one of you will have to amend your return.
For those returns that are randomly selected for an IRS audit, good record keeping can help you pass an audit in the event you are selected in the audit lottery. So save all evidence of your income and deductions after you have filed your return.
Talk to a CPA
CPAs can help taxpayers file their returns accurately and, if needed, guide them through the audit process. In fact, CPAs are among the few designated professionals allowed to represent clients in front of the IRS. A CPA can work with you to prepare an accurate tax return so you don’t inadvertently flag yourself for an audit.
Looking for a CPA by location or specialty? Visit www.picpa.org/moneyandlife
to access the CPA locator tool.