It's certainly not as fun as counting down to the new year, but as of this weekend you have less than three months to prepare your 2014 tax return for the Internal Revenue Service.
Doing taxes is a chore, and I can't say I know anyone who looks forward to what can be hours of calculations and receipt-hunting. However, tax time is also important for America's retailers and citizens, because more than 80% of tax filers will receive a refund from the government. These refunds help stimulate the economy as consumers spend that extra money, but they can also prompt increased saving in emergency cash accounts and retirement portfolios.
Will you be audited?
Just the word "audit" sends shivers down some people's spines as they imagine having to fork over additional money to the IRS for unreported income or ineligible deductions. Per the Tax Foundation and Pew Research Center, in 2010 an estimated 1.6 million people cheated on their taxes, giving the IRS good reason to randomly audit consumers.
In reality, your chances of being audited aren't that high. In 2011, the audit rate for people making between $25,000 and $200,000 was no more than 1%. Generally, higher-income individuals and those who claim no adjusted gross income but also qualify for tax benefits are most likely to be audited.
What can trigger an audit? Obviously, income is one warning sign, but mistakes that people make while preparing their taxes is another. The estimated 1.6 million cheaters represented just over 1% of all tax filers, meaning plenty of honest people wind up being audited and are found to owe additional money.
There's no surefire way to avoid an audit, as the IRS selects which people it audits at random. However, IRS data suggests that one specific way of filing your taxes makes you 41 times more likely to screw up, which can certainly increase your chance of an audit. This tax faux pas is none other than filing your return on paper.
Too much room for error
I know what you're probably thinking: "People still prepare their tax returns by hand?" Trust me, I'm as flabbergasted as you, because I've read some of the thousands of pages of U.S. tax code, and it's often hard to understand. Yet IRS data from 2013 shows that 25.2 million paper returns were filed that year, while the remaining 122.5 million tax returns were e-filed.
The good news here is that 91% of all people, including tax professionals, used tax software for preparing their returns, whether or not they filed on paper. But this means that 13.3 million people completed their tax return by hand in 2013 without the use of tax-prep software.
Now here's the problem: According to the IRS, the error rate for paper returns is 21%, compared to just 0.5% for e-filed tax returns. IRS employees and their tax software are designed to pick up on calculating errors and transposed Social Security numbers with paper returns. Yet even less obvious factors can doom paper-return filers, such as illegible handwriting and even errors by IRS agents who transpose your numbers when entering them into their database. In other words, your chances of an audit skyrocket when you file your return on paper.
A simple solution
The solution here is simple: Always use tax-preparation software when preparing your taxes, or consider using a tax professional who uses tax preparation software, and e-file your return!
Tax-prep software is easier to access than ever. The IRS notes on its website that if you earned less than $60,000 in income in 2014 (54% of all American families made $60,000 or less as of two years ago), you may qualify for free brand-name tax software that can walk you through the tax preparation process. If you made more than $60,000 you can still use the IRS' Free File software, which will handle the tough calculations for you, but you'll need to understand how to prepare your taxes, as it won't walk you through the process step by step.
In addition, volunteer assistance programs are in place for the elderly and others who made $53,000 or less in 2014. These tax helpers have been trained by the IRS and will use tax software to ensure your return is prepared correctly.
Another option is to turn to a tax professional. This isn't to say a tax professional will never make a mistake, but in many instances they allow their clients to pay a little extra for the peace of mind of being represented by that firm in case of an audit.
Whatever path you take in the upcoming tax season, make sure it includes tax-prep software and ends with your return being e-filed with the IRS.
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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