It's officially tax time, which means there's a good chance you're feeling the urge to say both "Yay!" and "Yuck!"
Taxes certainly aren't any fun to do. Combing through a year's worth of financial records and receipts, adding up interest paid, calculating health expenses, and matching up investment sales with initial buys is a tedious task. According to 2009 statistics from the National Taxpayers Union, taxpayers spend 3.8 billion cumulative hours complying with federal tax laws each year. Keep in mind this doesn't take into account state tax laws, either. In monetary terms, this equates to nearly $92 billion "spent" to comply with the U.S. federal tax code, based on the average hourly private-sector earnings.
But there's also a light at the end of the tunnel: More than 80% of all tax filers in recent years have received a refund. For some taxpayers, a refund is the only way to build up their emergency savings or add to their retirement savings. Whether they lack discipline with excess cash or simply fail to adjust their tax withholdings in their favor, tax time is critical to some Americans' savings and retirement accounts.
Yet tax time is also when the Internal Revenue Service goes on high alert for cheaters. Tax evaders cost the U.S. government about $3 trillion between 2000 and 2010, and they're a major factor in our nation's ongoing budget deficit.
Most taxpayers are honest people
The good news is that most taxpayers are honest people who have little reason to fear an audit.
According to the 2014 Taxpayer Attitude Survey released by the IRS Oversight Board in December, 86% of Americans believe it's not acceptable to cheat on their taxes, with a whopping 94% of Americans either completely or mostly in agreement that it's every American's duty to pay their fair share of taxes.
This 94% figure is actually a six-year low, but all things considered, it's a sign that most workers understand that they're playing a role in funding the federal government. Furthermore, 61% completely or mostly trust the IRS to fairly enforce federal tax laws. In other words, while we may dislike paying taxes, a vast majority of Americans understand that it's the right thing to do and believe the IRS is doing a good job of enforcing the tax laws.
This was highlighted in the IRS Oversight Board's line of questioning on what influences taxpayers to honestly pay their taxes. The overwhelming response was personal integrity, which, notably, has risen as the top answer from 88% in 2002 to 92% in 2014.
A few bad apples spoil it for the bunch
But we know there are bad apples out there, too. Based on the IRS Oversight Board's study, one in nine taxpayers, or 11%, believe it's OK to fudge their taxes here and there. This is down 1% from 2013 and 3% from 2011, although it doesn't match the lows set in 2008 of just 9% who responded that it was OK to cheat on their taxes.
Interestingly, though, 6% of respondents in 2014 mostly or completely disagreed with the assertion that it's every American's civic duty to pay his or her share of taxes. While not a large amount, it was the highest reading on record and could signal that some level of displeasure toward the current tax code among taxpaying Americans is growing.
It's this small but still important crowd that the IRS is focused on during tax season.
Will I really be audited?
In reality, the IRS doesn't have a crystal ball, so weeding out the cheaters from the honest folks isn't as easy as it sounds. This is why the agency tends to audit taxpayers on a bell curve.
The overall audit rate for an individual taxpayer in 2013 was about 1%. As you might have guessed, upper-income earners tend to be the most susceptible to an audit, with WalletHub noting that individuals making $10 million or more per year are 39 times more likely to be audited than a taxpayer who made $25,000 to $100,000 in 2013.
However, those who claim no adjusted gross income but file their taxes are also susceptible to an audit about 6% of the time. The Earned Income Tax Credit, which is given to lower-income working Americans, is a big source of fraud for the IRS, with an estimated $11 billion of its $55 billion in annual refunds going to taxpayers who are in fact ineligible for them.
Three easy ways to reduce your chance of an audit
Although there are easily more than a dozen ways for taxpayers to reduce their chance of being audited, here are three simple and highly effective methods.
The first (surprise, surprise!) is to be honest on your tax return. IRS agents are trained to look for so-called "red flags" on tax returns, including extremely high levels of deductions or understated income. If you're looking to deceive the IRS and its agents, you could find yourself in for a rude and expensive awakening. Your best bet here is to simply be honest on your tax return.
Secondly, consider e-filing your tax return as opposed to turning in a paper form. According to the IRS, paper forms are 41 times more likely to contain errors than those that are e-filed. Between misplaced numbers, errant calculations, illegible writing, and even the occasional clerical error on the IRS' part, paper returns cause your odds of being audited to skyrocket.
Finally, keep your deductions reasonable. Don't have a receipt for a donation you made to charity? Don't include that deduction in your taxes. If you're Itemizing your deductions to reduce your taxable income more than the standard deduction allows, no problem -- just make sure you have your receipts handy so you can prove the deductions are valid. Also, if you're a self-employed individual, make sure you understand what is and is not deductible as it relates to personal business expenses, as this is one of the more commonly error-prone areas during tax season, and the IRS is well aware of it.