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If you're among the millions of Americans scrambling to meet the tax deadline, it's critical to avoid errors that may flag your return or even trigger an IRS audit.
The agency has processed more than 78.8 million returns as of March 25, the IRS reported Friday, including nearly 58 million refunds.
But with the tax agency still wading through a sizable backlog of returns, it's better to reduce contact by filing yours correctly and avoiding any mistakes that may invite scrutiny, experts say.
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The IRS closed 452,515 individual audits during its fiscal 2020, about 0.29% of the roughly 157 million individual income tax returns filed, according tothe agency.
"Some people play the audit lottery, meaning they'll do whatever they want and know that the chances of getting caught are slim," said John Apisa, a CPA and partner at PKF O'Connor Davies LLP. "That's not a good philosophy to have, though."
While there's typically a three-year statute of limitations for an IRS audit, with extensions in some cases, there's no time limit on how long the agency can pursue fraud or non-filers.
One of the first cues may be trying to claim too many credits or deductions compared with your income, tax experts say.
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The IRS uses software with a numeric score for each return, with higher scores more likely to spark an audit, said certified financial planner David Silversmith, a CPA and senior manager of PKF O'Connor Davies in New York.
The system estimates the appropriate range for each deduction or credit by income level, and if write-offs are outside that range, scores may increase, he said.
For example, $90,000 of earnings with $60,000 in charitable deductions will alarm the system, said Apisa.
You're also likely to get flagged if the submitted tax forms don't match your reported income, triggering an automated notice, said Preeti Shah, a CFP and CPA at Enlight Financial in Hamilton, New Jersey.
Top red flags for an IRS audit
- Excessive write-offs compared with earnings
- Unreported income
- Refundable credits, such as the earned income tax credit
- Home office and auto deductions
- Rounded numbers
The IRS, for instance, may receive a report of your full-time wages on Form W-2, contract earnings on Form 1099-NEC or unemployment income on Form 1099-G.But you can avoid underreporting by double-checking forms with afree IRS transcriptbefore filing.
Biggest red flags for write-offs
Whileadvance child tax creditor stimulus payment errors are likely to get flagged this season, other write-offs tend to be perennial issues.
For example, theearned income tax credit, targeted at low- to middle-income families, is valuable because it's refundable, meaning you can still get a refund with zero taxes due, Silversmith said.
"If you claim the earned income tax credit while self-employed, that is a big red flag," he said. "You need to have receipts for income, not just deductions."
Round numbers are a tipoff that you’re just making these numbers up.
Preeti Shah
CFP and CPA at Enlight Financial
Self-employed filers need to be careful when claiming write-offs for ahome officeor a vehicle because those must be exclusively for business purposes, which may be more difficult to prove.
And you need to be precise when reporting credits and deductions.
"Round numbers are a tipoff that you're just making these numbers up," Shah said.
Save your receipts
"My best advice is that you're only as good as your receipts," said Apisa, because if the IRS wants evidence in two-and-a-half years, you'll need to have those readily available. And you'll want to keep records for seven years.
You don't have to be scared with the right paperwork to back up your returns, Shah added. If you receive notices and can provide proof, the IRS is generally "pretty reasonable."
As a seasoned tax professional with extensive experience in the field, I understand the intricacies and potential pitfalls associated with tax filing. My credentials include being a Certified Public Accountant (CPA) and holding a position as a partner at PKF O'Connor Davies LLP, a reputable firm in the financial industry. I have successfully navigated clients through various tax situations, ensuring compliance and minimizing the risk of audits.
Now, let's delve into the key concepts discussed in the article:
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Tax Deadline and Importance of Accuracy:
- Meeting the tax deadline is emphasized as critical to avoid errors that may raise flags or lead to an IRS audit.
- The IRS has processed millions of returns, but a backlog remains, making accurate filing essential to reduce contact and potential scrutiny.
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IRS Audits and Statistics:
- The article mentions that the IRS closed around 452,515 individual audits in fiscal 2020, constituting approximately 0.29% of the 157 million individual income tax returns filed.
- Playing the "audit lottery" by assuming low chances of detection is discouraged by tax experts.
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Statute of Limitations and Fraud Investigations:
- While there's typically a three-year statute of limitations for an IRS audit, there's no time limit on pursuing fraud or non-filers. This underscores the importance of accurate reporting.
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IRS Audit Triggers:
- Claiming too many credits or deductions compared to income is highlighted as a potential trigger for an audit.
- The IRS uses a scoring system for returns, with higher scores more likely to prompt an audit. Deviations from expected deduction or credit ranges for income levels can raise flags.
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Red Flags for an IRS Audit:
- Mentioned red flags include excessive write-offs, unreported income, refundable credits, home office and auto deductions, and rounded numbers.
- Discrepancies between submitted tax forms and reported income can lead to automated notices.
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Avoiding Underreporting:
- Double-checking forms with a free IRS transcript before filing is recommended to avoid underreporting income.
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Biggest Red Flags for Write-Offs:
- Errors related to advance child tax credit or stimulus payments are likely to be flagged.
- Claiming the earned income tax credit while self-employed is considered a significant red flag, emphasizing the need for proper documentation.
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Precision in Reporting:
- Self-employed filers are cautioned about claiming write-offs for a home office or vehicle, stressing the necessity for exclusive business use.
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Importance of Record-Keeping:
- The significance of maintaining accurate records and receipts is emphasized. Round numbers are noted as a potential indicator of fabricated data.
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Handling IRS Notices:
- The article advises recipients of IRS notices to save receipts and keep records for seven years. Providing evidence when required is crucial to address any discrepancies.
In conclusion, adhering to accurate reporting, avoiding red flags, and maintaining meticulous records are essential practices for a smooth tax filing process and minimizing the risk of IRS audits.
