The IRS can audit you if you fall into one of these 7 categories
As if filing taxes wasn’t enough of a headache, there’s the constant worry of being singled out for a tax audit. Indeed, if pop culture is to be believed, audits lurk around every corner.
Well, relax. Less than 1% of individual registrants – 0.63%, in fact – were audited between 2010 and 2018. Of course, that doesn’t mean you never be audited. There is always the possibility that a mistake or error in your statement will end up with someone taking a closer look.
Audits aren’t exactly random, though. Some people tend to set off more alarms than others, making them more likely to be audited at some point. Here are seven things that can increase your chances of being audited.
1. You detail your deductions
The more complicated your tax return, the more likely it is that mistakes will be made. If you itemize your deductions – instead of just taking the most common standard deduction – you are more likely to be audited. If you choose to itemize, be sure to keep your documentation in case you need to back up your claims.
2. You are self-employed and/or work from home
Self-employed people, freelancers and people who work from home may be eligible for a range of deductions not available to the typical worker. For example, if you work from a home office, you can often deduct a portion of your housing and utility payments. But these deductions have a lot of fine print that can be easy to overlook; they’re also ripe for, uh, exaggeration. Deductions that seem above the norm may be enough to trigger an audit.
3. You have assets in another country
It’s not uncommon for people to use banks or foreign investments to dodge US taxes — and the IRS is well aware of many of these tricks. Any assets or cash you have in another country may require an auditor to review your bank accounts to ensure that you are accurately reporting your income and assets in your country. and abroad.
4. You received an income-based allowance
Some of the credits or benefits you may receive are income-based, and the IRS will definitely take a look to make sure you truly qualify. For example, many returns that include the Earned Income Tax Credit (EITC) will be reviewed to ensure the income requirements are met. Also, expect the IRS to verify that you were within the income threshold for any stimulus checks you received.
5. You declare zero or negative net income
Besides the very wealthy, the category of people most likely to be audited are those whose statements claim no net income or negative net income. This could be due to investment or business losses exceeding the income for the year. Overall, however, this typically includes less than 0.5% of people who deposit.
6. Your income and lifestyle seem incompatible
The IRS has automated systems in place to help manage the millions of returns filed each year. These systems use algorithms that look for anomalies, especially when your income seems insufficient to support your lifestyle. For example, if you won $50,000 but gave away $40,000, you will likely set off some red flags. Likewise, if you’re claiming a tax credit for a six-figure mortgage, but your income isn’t enough to support a mortgage of that size, someone may decide that your return needs a second look.
7. You are a millionaire
People who earn $1 million or more per year are audited at higher rates than low-income people. And an audit becomes more likely the higher you go; people with incomes of $10 million and above are often the most frequently audited. Which makes sense if you think about it. Who is worth more money to the IRS, the person who underpaid by $500 – or the person who underpaid by $500,000?
An audit is not the end of the world
While seeing that IRS logo on an envelope when you check the mail might make your heart race, it’s usually not as scary as pop culture makes it out to be. In many cases, an audit is simply due to an error in your statement, not a calculation problem. And they don’t always mean you’ll owe more; some audits actually lead to a larger yield, rather than a smaller one.
Either way, keep your tax documents for at least three years to make sure you’re prepared if that dreaded letter hits your mailbox. You should also be aware of the audit protection policy of any tax preparation software or company you may use.
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