Here we are, in the thick of tax season, and many Americans are dreading the thought of a tax audit as they prepare their returns. When it comes to a tax audit, there is good news and good news.
The first bit of good news is that for most of us, even if we do get audited by the IRS, it isn't likely to be a very traumatic event. Most audits are conducted via mail. The IRS will send you a letter questioning some aspect of a tax return, and you will reply, perhaps justifying some claimed deduction by sending in supporting receipts or documentation. It can be as simple as that. An audit doesn't necessarily mean you are in trouble; it very often simply means that the IRS has a question or two.
Oh, and by the way -- your odds of being audited are actually quite low and have been falling in recent years, too -- in part because of Congress repeatedly cutting the IRS's budget. In 2015, just 0.84% of individuals' tax returns were audited -- that's less than 1%. For those earning less than $200,000, it was only 0.76%. (It was close to 10% for those earning more than a million dollars, though.)
Avoid that tax audit!
The next bit of good news is that there are things you can do to avoid being audited. Here are some examples:
- Don't leave out information. Know that the IRS gets copies of 1099 forms and other forms detailing your financial life, and it will be looking to match the numbers it has with the ones you report. Discrepancies or missing information can trigger a tax audit.
- Don't be extreme. This can't always be avoided, but know that if you claim an unusually steep deduction for, say, charitable donations or your home office, the IRS might want to take a closer look and make sure it's legit.
- Don't be messy. If people or machines at the IRS can't read your return, don't be surprised if the IRS comes back to you with some questions.
- Don't make mistakes. Don't catch the IRS's attention because your math in some section doesn't add up, or because you accidentally left out your Social Security number.
- Don't think it's OK to not file a return. It isn't. Even if you have no income, you need to file a return, showing that. (That said, having no income will up your odds of being audited. In 2014, about 5.3% of returns with no income were audited.)
The bad news
There is some bad news about tax audits, though: If you have actually been trying to cheat the U.S. government, a tax audit can make that clear and can lead to stiff financial penalties -- and sometimes even time in prison if, say, you've been engaging in tax fraud.
For most of us, though, a tax audit is simply a hassle we can try to avoid.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns no shares of any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.