The idea of a tax audit strikes fear in most Americans. If you are preparing taxes at the last minute, be on the look out for tax audit red flags.
What are you chances of being audited? Latest reports show that 138 to 140 million individual tax returns are filed each year. And between 1.4 and 1.6 million are audited, that’s one to 2 percent of all returns. If you happen to be one of the unlucky ones that are chosen there is much to be concerned about. Those that have lied on their tax returns may be subject to 20 percent penalty charges, 75 percent penalty charges, and even jail time.
Here are ten tax elements to be wary of:
- Mistakes and typos. If your tax returns are filled with mishaps you’ll most likely be audited. The IRS may audit you so you can clarify your mistakes (like if you wrote the wrong social security number) or because they believe you’re hiding something.
- Your income matters. Failing to report all of your income leads to trouble, as does having a high amount of income. The more money you make the higher you chances are to be audited (for instance seven percent of people who make one to five million dollars are audited).
- Higher deductions. If your deductions are higher than average you maybe flagged for an audit. For instance, if your total donations are more than $500 you should have receipts to back up your claim.
- Beware of certain write-offs. Commonly abused tax write-offs are more likely to raise red flags than others. Credit for adoptions and first-time homeowners are often taken advantage of, as is the Earned Income Credit.
- Claiming dependents. Claiming someone who does not qualify as a dependent or someone who has already been claimed by someone else can lead to a red flag.
- Foreign bank accounts. Having money overseas has become a major red flag recently. So, be sure to account for every last cent.
- Stock investments. Though it’s been a few years since the stock market crash, the IRS is still vigilant about those the report stock investments in their report. Be sure to report a clear and exact amount.
- Having your own business. Since businesses have a lot of tax leeway, people with their own business are more often audited. If you would like to make deductions for business meals and travels be sure to keep receipts and accurate records.
- Special types of businesses. If you run a cash-only business (like a laundry mat, a flea market booth, or babysitting service) or if your business seems more like a hobby you’re more likely to be audited.
- Claiming home offices for business. You should be sure that the area is used exclusively for work and be your primary workspace for your businesses. And only claim that one area, not the whole house (as other have tried and failed).