Red Flags

tax return red flagI’ll always call the UK my home, but I have lived and worked in the U.S. for the past 15 years.  I used an accountant for many years to help me file my income taxes, and once he retired, I decided I could do it on my own.  Big mistake!  I received a letter last year from the Internal Revenue Service saying I was being audited.  I didn’t know what I had done to deserve it.  I felt like the walls were closing in on me, my air conditioning had broken and I needed to call air conditioning repair Hoover, and that I was going to have a stroke.  I called my accountant friend and he helped calm me down, and the audit wasn’t as bad as I had thought it would be, though it wasn’t very pleasant either.  Anyway, once it was over, I started doing some research about why they picked me to audit.  I’ve compiled a list of things that can cause red flags on your tax return.  Avoid these and hopefully you won’t find yourself in the same situation I did last year! 

tax audit

Mathematical Errors:  All tax returns are run through a computer, and if there are numerical errors, this will draw attention to your return.  There are plenty of free tax software programs that you can run your return through before submitting it to check for mathematical errors.

Taxable Income:  If you report a different amount of income than what is listed on your W-2 and 1099 forms, you will flag the IRS’ computers.  The people who pay you send a copy of your W-2 and 1099 directly to the IRS, so there’s really no way to hide any taxable income from them.

Filing Position:  Comparisons are made between similar taxpayers or private corporations.  They look at the relationship of purchases, sales, and tax returns of other businesses in the same industry, as well as the tax returns of shareholders of a private corporation in comparison to the corporation’s taxes.  Filing positions which are not in line with industry expectations will tip off the IRS that they need to investigate.

Typing Errors:  When you pay a tax preparer to file your taxes, you assume that they are going to do everything correctly, but this is not always the case.  Even if you do them yourself, it is very easy to make simple typing and entry errors on your return.  No matter who prepares your return, it is extremely important to review everything for errors or you might be faced with an audit.

Charitable Deductions:  If you donate to charity, you can file for tax deductions, but will send out warning signals if you report unusually high numbers.  The IRS likes statistics so if you report charitable donations that are not similar to others with your income level, they will think you are up to something.  Be sure to assess your donations accurately if you donate clothing or other items, and be sure to take the proper steps when making large monetary donations.

High Income:  While it’s great that you are earning a lot of money, the IRS audits people with an income over $200,000 four times more than the national average.  There’s not much you can do about this, so just be sure to keep excellent documentation of everything and you should be fine.    

income tax auditWhile the IRS says that audits are completely random, they do monitor and investigate anomalies in tax returns.  Just keep accurate records and report all of your earnings every year, so even if something looks funny on your return, you’ll be able to back it up if they do decide to look into it.

Kevin T