Ever wonder how the Internal Revenue Service selects which taxpayers to audit? Well, it isn’t always a matter of chance. There are certain factors that 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 with USAA.
Here are eight potential red flags that could trigger the scrutiny of the IRS – and tips to help you survive an audit.
1. High incomes. Your chance of being audited substantially increases once your income crosses $ 200,000, according to a recent IRS report.
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 this 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? 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. A tax-preparation service that calculates figures you enter, such as TurboTax, may help you avoid clerical errors that raise auditors’ eyebrows. Still, you’re responsible for providing the correct information.
6. Business losses. In a tough economy, business losses are more common, but that doesn’t mean the IRS won’t double-check them. 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. If you’re 64 or younger, you can deduct these costs only to the extent they’re greater than 10 percent of your adjusted gross income. It’s important to keep detailed records. Remember, you can’t deduct the cost of over-the-counter medicine, health club dues or most cosmetic surgeries.
If you’re doubtful about the decisions made when completing and filing your tax return, consider hiring a professional. Spending money for expert guidance today could help you avoid paying increased taxes and penalties tomorrow.
And if you get a letter from the IRS, don’t take it personally. “The government wants to make sure your return is accurate,” Montanaro says. “It’s time to get all of your documentation and supporting records in order.”
To get through an audit smoothly, consider following these common-sense rules:
* 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 stuff together, you or your representative may request a postponement.
* 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 result in heavy fines and even jail time.
* Stick to the topic. Whether you’re answering a question or responding to a request for records, only give the IRS what’s been requested.
* 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.