Are you like many Americans and wonder whether or not your most recent tax return is going to be audited? Odds are you have nothing to worry about, as only 1% of individual taxpayers and small businesses get selected for an audit, according to a report by Wallet Hub.
However, there are certain groups of taxpayers who are more prone to being audited, and common miscalculations you'd better get right the first time.
Photo: flickr/401(k)2012
How much do you make?
Income level is the biggest factor that determines whether or not you're likely to be audited.
Those individual taxpayers with the highest incomes are many times more likely to get audited than those with "average" incomes. For those making $200k - $500k, the probability of being audited jumps from 1% to 3%. Filers who made more than $10 million have a whopping 24% chance of being audited.
This is done because the IRS chooses to allocate its resources to those taxpayers who are likely to owe the most if a miscalculation is uncovered.
But it's not just those with high incomes that have a high risk.
Filers who reported no adjusted gross income whatsoever have almost as much audit risk as those who made over $1 million. Taxpayers who reported under $25,000 in income also have a slightly elevated risk. The "sweet spot" of lowest audit risk is for those taxpayers who earned between $25,000 and $200,000.
Other red flags
One of the most common audit triggers is taking a home office deduction, simply because too many people claim it when they aren't entitled to it. Home office deductions apply to areas of your home used exclusively as your principal place of business, so setting up a computer desk in the family room doesn't count.
If you are self-employed, claiming too many business meals, travel expenses, and entertainment costs are another thing the IRS is on the lookout for.
If you're charitable deductions are very large compared with your income, it could also set off some bells. If the contributions are legitimate, it shouldn't be a cause for concern, but make sure you can properly document everything.
Get the numbers right!
In all fairness, tax returns are incredibly complicated, especially for small businesses, so a small error here and there is to be expected. However, there are some errors that are much more common than others, so you can bet the IRS is on the lookout for these.
Of the math errors uncovered by the IRS, one-fourth of them are errors in the final tax calculation. This is a pretty big one...it's the actual amount of money you have to pay the government, or hope to receive from the government, so this is definitely double-checked.
15% of all math errors on taxes have to do with claiming too many or too few exemptions. If you claim exemptions for five children and your dependent mother-in-law, you'd better be prepared to back it up.
Other common errors include miscalculating the Earned Income Credit (12% of errors) and errors in adding up itemized deductions (10%).
Ideally, you'll add perfectly on your entire tax return, but these areas in particular deserve a very close look.
What happens to those who get audited?
The IRS doesn't lose often: only 11% of audits result in no additional tax obligations.
The penalties for tax mistakes can be pretty stiff, depending on the severity of the error. Failing to file your return on time, for example, will cost you 5% of your unpaid balance per month, up to a maximum of 25%. On top of that, you'll be charged interest on both the unpaid balance and the penalties assessed until you are paid in full.
Worse yet, if you underpay by 10% or more due to negligence -- like a miscalculation -- the IRS can assess a penalty of up to 20% of the amount you owe.
The best way to protect yourself in the event of an audit is to double-check all calculations and get it right the first time, and this is especially true if you're in one of the "at-risk" income levels mentioned above.
The fewer red flags on your return, the less likely an audit becomes, and the less likely you'll have to pay up if you're audited.
