Imagine you’re going about your usual business: wake up, sip a cup of coffee, and read the morning newspaper. Suddenly, the phone rings, and you rush to pick it up, wondering who on Earth could be calling you at that hour. As you listen to the voice on the other end, your breathing speeds up, and a drop of sweat trickles down your cheek. It’s the IRS, and you’re about to be audited!
That’s a nasty surprise, and no one will blame you for dropping the receiver right afterwards. After all, you’ve been a good taxpayer all these years, so why are you suddenly getting audited now?
Four words: Breathe in, breathe out. Getting audited does not necessarily mean you’ve done something against the law. According to the IRS website, returns often get audited for these reasons:
- Your return for this year had some sort of statistical anomaly, compared to your previous returns
- The information written on your return doesn’t match the data from your records (e.g. Form 1099)
- You deal with other individuals or businesses that are currently undergoing audit, in which case you’ll probably need the help of cost management services to help you wade through the complexities of this situation.
To avoid these scenarios, check for the following prior to submitting your returns:
When you’re rushing to file your reports just like everyone else, it’s hard to avoid this simple but crucial mistake. Maybe you added an expense, instead of subtracting it. Maybe you wrote “69” in one line item, instead of “96”. Maybe you forgot to include, or exclude, a line item altogether.
In any case, always double-check your records before finalizing them. Better yet, ask a CPA for a second opinion, since accountants know a trick or two to check for calculation errors.
Aside from calculation errors, there are also treatment errors. For example, if you own an unused piece of property that has slowly degraded over time, you may have recorded “rental property loss” as an expense. Unless you’re earning passive income to offset this loss, though, this shouldn’t be the case.
There’s also the matter of deductions and exemptions. Make sure you’ve written down every one of these you’re qualified for—and excluded the ones you’re not qualified for. For more in-depth information on the subject, click here.
Exclusion of Offshore Accounts
Remember to report your foreign bank accounts as well. Otherwise, the IRS will impose heavy penalties on you, or worse, get you sent to jail. Also, you’ll have to deal with plenty of paperwork in the event you’re forced to come clean, which isn’t fun by any means.
Unusually High/Low Income and Expenses
If you earn $25,000 to $100,000 every year, you have a less than 1 percent chance of getting audited. Anything outside that range will probably arouse the IRS’ suspicions. Also, any drastic and unusual change in your income (e.g. your usual $25,000 income last year spiked up to $50,000 this year) might be considered for further investigation.
The same principle applies for expenses. If you were feeling particularly generous this year, and splurged half of your income on a new car as a result, chances are you’ll attract the attention of the IRS.
Basically, if you’ve enjoyed a windfall or made a major expense/investment in any given year, ensure that you disclose this in your return. Don’t forget to keep the supporting documents for these in a safe place; it’s likely the IRS will ask for them when they conduct an audit on you.
Since the IRS revises its rules on a regular basis, it’s best to log on to their website and check for updates before you do anything with your tax return. If you find the rules too confusing, ask a professional—like a lawyer or an accountant—to clarify these for you. Once everything’s clear, file your returns and double-check—or, if you have the time, triple-check them—for errors. That way, you’ll have peace of mind as a taxpayer, and as a law-abiding citizen of this country.
Image Credit: 401kcalculator.org