Two of the most frightening words most Americans can hear are “IRS audit.” While only a small percentage of returns for fiscal year 2022 were audited, if you’re among the unlucky few who have to face an audit, that’s little comfort.
You may have heard that only very wealthy people are audited. Those with a high annual income are typically more likely to face an audit than middle-class taxpayers. However, other factors can bring your return to the attention of the IRS. Let’s take a look at a few.
In addition to income reported on a W-2 by your employer, you typically need to report anything listed on any 1099 form. This includes income you receive as an independent contractor and interest income from financial institutions and investment earnings.
Don’t just wait for your 1099s to come in by mail or email. Keep track of what forms you should receive and from whom so you can follow up before doing your taxes if you’re missing one.
A large amount of credits and/or deductions for your income
Anything that looks “out of whack” can be a red flag for the IRS. A person who reports $50,000 in income, for example, and $10,000 in charitable donations is going to stand out. It’s possible that they’re living primarily on nontaxable income or sitting on a lot of savings. However, things like this can get your return flagged for further scrutiny – at least the first time it happens.
You can round up to the nearest dollar when listing income, deductions and other dollar amounts on your return but not to the nearest $100 or $1,000. If all of a taxpayer’s figures are round numbers, it seems obvious that they’re just guessing. Be prepared to produce documentation.
Documentation is key
As you prepare your taxes (with or without the help of a tax preparer), make sure you have documentation to back up everything you report. Much of this is now accessible via computer. What isn’t, you can always scan and keep them together in labeled (and properly secured) folders on your computer. Retain this for at least the number of years recommended by the IRS based on your unique situation.
If you’re facing an audit, it’s always wise to have experienced legal guidance. This can help you resolve it as quickly as possible and minimize the financial and other consequences.