Please ensure Javascript is enabled for purposes of website accessibility

Make These 4 Tax Mistakes and the IRS Could Come Knocking

By Kailey Hagen – Mar 10, 2019 at 7:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

No one wants to be audited. Reduce your risk by avoiding these four mistakes.

Taxes can be confusing, and many fear that if they make a mistake on their return, the government will sentence them to death by paperwork via an audit. While your chances of being audited are small, it could happen, especially if you make one of the following mistakes. Before you file your return, give it one last glance to make sure you don't notice any of these red flags.

Suited man inspecting document with magnifying glass

Image source: Getty Images.

1. You forget to report some of your income

The surest way to trigger an audit is to hide some of your money from the government. Whether it's intentional or not, the government isn't forgiving when it comes to reporting the wrong taxable income, especially if it's off by a large amount. If you received a 1099 or a W-2, the government already knows you earned that money because your employer also sent that information to the IRS. If your tax return doesn't match the government's records, it may start asking questions. Even if you didn't earn enough to receive a 1099 or if you did side jobs for cash, you should still report this income on your taxes, for the sake of honesty and audit prevention.

Before you submit your tax return, go back through it and make sure all the numbers are correct. It's possible that you accidentally transposed some numbers or added incorrectly, and this simple mistake could set off alarm bells with the IRS.

2. You deduct charitable donations you can't prove

There's nothing wrong with writing off your charitable contributions if they're legitimate, but if you're claiming $15,000 in donations with a $30,000 reported income, that's going to raise red flags. You should only claim donations you've actually made -- promises don't count -- and only donations to qualified tax-exempt organizations are tax-deductible. Depending on the type of organization, you can write off donations up to 30% or 50% of your adjusted gross income -- your earned income, minus other tax deductions. Ask the organization you're donating to if you're unsure how much you can legally write off.

Keep records of everything. You should have bank or credit card statements or canceled checks to document all the money you donated, and you should have a written statement from the organization you donated to if the donation was $250 or more. If you're donating goods that may have fluctuated in value since you purchased them, fill out Form 8283 with their current fair market value. Get an appraisal if you believe the items are worth $5,000 or more. You don't have to submit this paperwork with your taxes, but you'll need to keep it in case of an audit.

3. You deduct too many self-employment expenses

Just like with charitable contributions, there's nothing inherently wrong with deducting home office expenses or a business trip if you're self-employed. But many abuse these deductions and so the government looks more closely at those who claim them. You can only claim legitimate business expenses. A dedicated office that you use exclusively or primarily for work qualifies, but occasionally working from your bedroom or living room doesn't make them home offices. The same rules apply for other business expenses, like supplies, travel, or vehicle costs. If they're not solely or mostly work-related, they don't count as self-employed tax deductions.

You'll need records of all business expenses. This means keeping all receipts for office supplies, logging the driving you do for work, and saving utility bills if you're claiming a home office deduction. Even if you do this, it may not stop the government from auditing you, but you'll be able to prove your deductions were legitimate.

4. You round your numbers too much

Too many round numbers could be a sign that you're fudging how much you earned or how much you spent on business deductions. You may not get in trouble for rounding to the nearest dollar, but if you round to the nearest $10 or the nearest $100, the government may think you're trying to cheat on your taxes. If you're unsure of the exact cost of a deductible expense, it's better to check your receipts than to estimate. And remember, if you don't have proof of the expense, you can't deduct it at all.

Even if you follow all of the rules, there's still a chance the government could audit you, but by avoiding these four mistakes, you can reduce these odds. If you've already filed your taxes and you notice a mistake, file an amended return with the correct information before the government comes asking you for an explanation.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.