In the grand scheme of filing taxes, nothing invokes instant fear like an IRS audit notice. Now the reality is that getting audited isn't usually the harrowing experience the media might portray it to be. Generally, an audit goes something like this: You receive a letter in the mail from the IRS asking for clarification or evidence in support of the information you've entered on your tax return. You provide that additional detail, and you're all set. Still, most tax filers would prefer not to get audited, and if you're one of them, these three moves could keep your name off that dreaded list.
1. Report all of your income
Whenever you earn money, the IRS is entitled to a piece of it. Now you probably know that you need to report the income you earn from your primary job -- that's where your W-2 comes in. But what about the income you earn from a side gig?
Unfortunately, the IRS is entitled to some of that, too, and if you don't report those earnings, you'll increase your audit risk. Any client who pays you $600 or more in the course of a given year on a self-employment or freelance basis must send you a 1099 form summarizing that compensation. But for each 1099 you receive, the IRS gets a copy as well, and if you don't come clean about that income, you may land on its audit list.
The IRS is also entitled to the income you earn from investments or your savings in the bank. You'll get 1099 forms summarizing that income as well, so plan to acknowledge it on your tax return.
2. Don't just guess at deductions
You may be entitled to a host of valuable tax deductions that serve the very important purpose of shielding a portion of your income from the IRS's reach. But if you guess at those deductions rather than base them on official records, you'll increase your chances of getting audited.
Imagine, for example, that you're self-employed and are claiming a deduction for $500 in office supplies for the year. That's a conveniently round number, so even if it's mostly accurate, you're better off combing through your receipts and listing that deduction at $493.57. Similarly, if you're deducting medical expenses, the IRS may take notice if yours come in at precisely $7,500, so look through your records and put down the exact figure you racked up.
3. Make sure your deductions are proportionate to your income
There's nothing wrong with claiming the tax deductions you're entitled to. But when those deductions are almost unbelievably high relative to what you earn, it could easily raise a red flag. Imagine you're self-employed and report an income of $60,000 for 2019, along with deductible business expenses of $40,000. The IRS might question how it is you're able to afford to spend so much on your business when it only generates a modest profit. On the other hand, if you claim $40,000 in expenses against $160,000 of income, that doesn't look so unusual.
The takeaway? Be careful when pushing the limits on deductions, especially if your income can't really support the numbers you're claiming. And if you do legitimately have a large level of deductions relative to your income, keep meticulous records on hand so that if the IRS questions you, you'll have evidence to point to.
While tax audits might seem common, the reality is that they're pretty rate. In fact, the IRS only audited about 0.5% of all tax returns filed in 2017. Still, you're better off doing everything you can to stay off that list, and so following a few simple rules could make for a much less stressful tax season on a whole.