Tax season is getting started: 7 reasons the IRS will audit you
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Nothing is inherently sinister about a tax audit.
An audit is simply the Internal Revenue Service double-checking your numbers to make sure you don’t have any discrepancies in your return. If you’re telling the truth (and the whole truth), you need not worry.
However, people who are consciously cheating the system do have reason to be concerned.
The IRS conducts audits to minimize the “tax gap,” or the difference between what the IRS is owed and what the IRS actually receives. Sometimes audits are random, but the IRS often selects taxpayers based on suspicious activity.
We’re against subterfuge. But we’re also against paying more than you owe. As you walk the line this tax season, here are seven of the biggest red flags likely to land you in the audit hot seat.
1. Making math errors
When the IRS starts investigating, “oops” isn’t going to cut it. Don’t make mistakes. This applies to everyone who must file taxes. Don’t accidentally write a 3 instead of an 8. Don’t get distracted and forget to include that final zero. Mistakes happen, but make sure you double- and triple-check your numbers if you’re doing your own taxes. You’ll be hit with fines regardless of whether your mistake was intentional. If your math is a little shaky, using an online tax preparer or a tax professional can help you avoid unfortunate errors.
2. Failing to include a Form 1099 or additional income
Easy way to score an audit? Don’t report part of your income. Let’s say you’re employed herding sheep for Farmer Joe and pick up a little extra cash writing articles for a sheep-shearing publication on a freelance basis. You may be tempted to submit only the W-2 from your herding job and keep the freelance writing income on your Form 1099 under wraps. (Form 1099 reports the nonwage income you get from things like freelancing, stock dividends and interest.) Well, guess what? The IRS already knows about income listed on your 1099, so it’s only a matter of time before it discovers your omission.
3. Claiming too many charitable donations
If you made significant contributions to charity in 2015, you’re eligible for some well-deserved deductions. Most taxpayers who itemize deductions claim charitable deductions at an average of 3% of their income. This bit of advice is common sense: Don’t report false donations. If you don’t have the proper documentation to prove the validity of your contribution, don’t claim it. Pretty simple. Claiming $10,000 in charitable deductions on your $40,000 salary is likely to raise some eyebrows.
4. Reporting too many losses on a Schedule C
This one is for the self-employed. If you are your own boss, you might be tempted to hide income by filing personal expenses as business losses. But before you write off your new ski boots, consider the suspicion too many reported losses can arouse. The IRS may begin wonder how your business is staying afloat.
5. Claiming too many business expenses
Along the same lines as reporting too many losses is reporting too many expenses. To be eligible for a deduction, purchases must be 1) ordinary and 2) necessary to your line of work. A professional artist could claim paint and paintbrushes because such items meet both requirements. A lawyer who paints for fun and doesn’t turn a profit on the works couldn’t claim art supplies as a deduction. The question to ask is: Was the purchase absolutely necessary to performing my work duties?
6. Claiming a home office deduction
Home office deductions are rife with fraud. It may be tempting to give yourself undeserved deductions for expenses that don’t technically qualify. The IRS narrowly defines the home office deduction as reserved for people who use part of their home “exclusively and regularly for your trade or business.” That means a home office can qualify if you use it for work and work only. Occasionally answering e-mails on your laptop in front of your 72-inch flat screen TV doesn’t qualify your living room as a deductible office space. Only claim a home office deduction if you have set off a section of your home strictly for business purposes. Be honest when you report expenses and measurements.
7. Using nice, neat, round numbers
In all likelihood, the numbers on your 1040 and supporting documents will not be in simple, clean intervals of $100. When making your calculations, be precise and avoid making estimations. Round to the nearest dollar, not the nearest hundred. Say you’re a photographer claiming a $495.25 lens as a business expense; round that to $495, not to $500. An even $500 is somewhat unlikely, and the IRS may ask for proof.
This article first appeared in NerdWallet.