"Money Matters" with Dee Lee
The IRS does not like tax fraud, so let’s talk about what can set the IRS’s wheels into motion. They have a system that can easily red flag a tax return for audit. You can avoid an audit if you do not cheat or do something dumb because you are in a hurry.
Less than one percent of tax returns got audited. Most tax returns are handled by computers and there are formulas and averages for most of the categories. If the computer doesn’t like something, a human will read the return.
Many audits are simple paper audits where they send you a letter and you send them back the supporting documentation for the donations you made or the deductions taken.
The IRS will never call you on the phone or e-mail you and demand money. If this happens to you, this is a scam.
So what may trigger an audit?
1. Not reporting all of your income: The IRS cross checks your income sources with 1099s and W-2s. If your income has dropped that may be a red flag.
2. Claiming large charitable deductions: The IRS calculates what the average donation is for a person in your income bracket. If you are over that amount it may trigger an audit. If you make a contribution over $250 you will need a letter from the charity.
3. Earning a bunch of money: Over $200,000. You are more likely to be audited if you make the big bucks. Earn $1 million and you have a one in 9 chance of being audited.
4. Taking higher than the average deductions. If the deductions on your return are disproportionately large compared to your income, the IRS audit formulas will go “tilt”. So if you have large medical deductions be sure you can prove them if need be.
5. Home office deduction: There is a new, simplified calculation for claiming a home-office deduction. Be realistic though, with how much space you actually use in your home. The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500.
6. Business meals, travel and entertainment: Schedule C is filled with deductions for the self-employed individual. And the IRS has figured out that often some self-employed individuals tend to claim excessive deductions.
7. Claiming 100% use of your car for business: If you have set up a business and use your car for business, be honest about how much you actually use the car for business. Keep very good records of the miles you drive.
8. Cash businesses: If you have a cash-intensive business like an antique shop, junk shop, car wash, a bar, a hair salon, or a restaurant you are probably on the IRS’s short list!
9. Math errors: If you do a paper tax return in long hand, check your math and be sure to sign the return and use the correct social security numbers. A sloppy return can trigger an audit.