Each year, less than 1% of tax returns are chosen for an audit, but the idea of it happening to you may be frightening nonetheless. Now the reality is that the IRS doesn't have the resources to send agents to your door for audit purposes -- unless, of course, you're potentially cheating it out of millions. Most of the time, tax audits are conducted by mail. The IRS will send you a letter asking for more information about something you've put on your return, or proposing a change to your taxes that you either agree to or dispute. But for the sake of minimizing your stress, you're better off staying off the IRS's audit list, which means steering clear of the following mistakes.
1. Not reporting all of your income
You might think you can get away with earning $800 on the side walking dogs for a local agency, or with updating the occasional website and pocketing $1,000 in the process. But failing to report income is an easy way to get your taxes audited, so it's a risk not worth taking. Any client or company you work for on a freelance basis is required to send you a 1099 form summarizing your earnings if that figure exceeds $600 in the same calendar year. For each 1099 you receive, the IRS gets a copy as well, so don't lie about income that's well-documented.
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2. Taking tax deductions that look too clean
There's nothing wrong with claiming legitimate tax deductions, like business expenses or medical costs, and using them to lower your taxes. But if those numbers look too clean to be true, it could raise a red flag. Say you claim a $10,000 medical expense deduction because as per your estimates, that's roughly what you're entitled to. Your actual deduction may amount to $10,142, which means you're not over-claiming, but because the chances of you being entitled to exactly $10,000 are pretty slim, that round number could get you into trouble.
3. Claiming large deductions proportionate to your income
Deductions that seem too substantial relative to your income could cause the IRS to take a closer look at your tax return. For example, if you earn $60,000 a year and claim a $30,000 deduction for charitable contributions, the agency will probably question how it is you're able to give half of your earnings away.
4. Claiming 100% business use of your car
If you use your vehicle for business purposes -- such as to get back and forth from a tutoring gig, or to conduct research for articles you write on a freelance basis -- then you're allowed to claim a deduction based on the mileage you log. But if you attempt to convince the IRS that every single mile you logged last year was related to work activity, and that none related to personal use, then you could find yourself getting audited. Another thing: You can only claim a deduction for mileage as a freelance worker or independent contractor. If you're someone else's employee, you can't claim this deduction because you use your car to commute to your job.
Though getting audited may not be the harrowing prospect you'd expect it to be, it's still a scenario you're generally better off avoiding. And staying away from the above mistakes is a good way to make that happen.
