Good news, everyone -- your W-2s are now in the mail and you'll have an opportunity to do your taxes soon! Joy, right?
Most people don't actually enjoy doing their taxes, but more than 80% who file a tax return each year get money back from Uncle Sam, so it should actually be considered an exciting time for many citizens.
It's also an exciting time for the Internal Revenue Service, which processed 142.8 million returns in 2010 and audited 1.581 million of those according to statistics found at the U.S. Census Bureau. In fact, since 2000 the percentage of tax filings being audited has more than doubled from 0.5% to 1.1%, with the additional recommended tax per audit yielding $9,527 in 2010. In other words, the average audit uncovers errors that should produce an average additional tax of $9,527! Ouch!
It's often difficult to understand exactly what might trigger an audit from the IRS, and they certainly aren't forthcoming with that confidential information, but we did get a bit of a teaser last year when National Taxpayer Advocate was given access to confidential IRS record to determine what geographic areas, if any, tax cheats tend the hail from. The result, based on NTA's study, yielded five specific metros where tax cheats were the most common.
Five metros with the greatest number of tax cheats
The five metros with the greatest number of tax cheats were, in no particular order:
- Los Angeles
- San Francisco
- District of Columbia
For its study, the NTA focused solely on small proprietor businesses, because they have more of an opportunity to fudge their taxes than the average U.S. worker since they deal with cash transactions more often and don't have a standard paycheck that gets reported to the IRS.
The findings, as you can see, clearly point to a couple of commonalities.
First, areas of dense population are likely to have more tax cheats. We'll call this the "duh!" factor, and I certainly don't consider these metros being mentioned here as a huge shock in that respect.
What is quite noticeable, though, is that a number of these cities have upper-income suburbs that do tend to raise the IRS's eyebrows. Although income shouldn't have anything to do with whether you'll be audited, there's clear data that demonstrates that upper-income earners are more likely to be audited. In theory it makes sense -- if you're the IRS, why waste your time auditing a return where you'd only expect to find a small error when you could go after a possible tax cheat making millions of dollars that could net a much larger return?
Want to avoid an audit? Be smart!
With the percentage of tax filers being audited staying the same or rising every year between 2000 and 2010, it only makes sense to be extra vigilant on your tax return this year. That said, there are some key ways you can reduce your chance of being one of the approximate 1% of tax filers who do get audited.
The first thing you can do is a bit difficult at times, but it'll save you a lot of hassle in the long run if you do get audited: Be honest! I know, it's painful telling the IRS the truth on your tax form, but the more honest you are, the easier it will be to represent yourself in an audit and provide the receipts necessary to back up your deduction or income claims.
Another key to reducing your chance of an audit is to rely on more eyes. In other words, instead of preparing your taxes by hand (does anyone even do this anymore?), rely on tax-prep software from companies such as TurboTax, which is made by Intuit (NASDAQ:INTU), H&R Block at Home by H&R Block (NYSE:HRB), or TaxACT by Blucora (NASDAQ:BCOR). Not only do these three do-it-yourself tax-prep software solutions walk you through the process step-by-step, but they also do so for a nominal price and, in some cases, free of charge. Best of all, tax professionals helped create this software, so it automatically double-checks your tax return for any red flags before being filed with the IRS. This is the bread-and-butter time of year for these tax software companies, and they're geared up for a busier year than ever.
Lastly, and this comes straight from the advice of TurboTax, file your return electronically. Electronic filings, according to figures from the IRS, have an error rate of 0.5%, compared with an error rate for paper returns of a whopping 21%!
This is the smartest tax move you'll make all year
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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