The IRS estimates that 20-25% of all tax payers wait until the final two weeks to file their tax returns each year. If you’re one of these people, you need to make sure to take your time in an effort to avoid costly last-minute mistakes.
The three most common last-minute filing mistakes are math errors, incorrect SSNs, and failure to date (and sometimes sign!) the return. Most of the time, these errors will result in a delay of your return and additional paperwork. But what if you make an even worse mistake? What if your mistake leads to the dreaded audit?? Below are some of the most common “red flags” when it comes to tax audits.
Tax Audit Red Flags
Carelessness
Forgetting to sign your return. Forgetting to date your return. Writing/typing the incorrect Social Security number. Believe it or not, these are common mistakes! And they can be avoided…simply by. taking. your. time.
Math errors
As with the careless errors above, math errors can seem simple enough but can equate to one heck of a headache if they trigger an audit. Considering this is perhaps the most common source of audit-inducing fodder, make sure to double and triple check those numbers. If you rely on tax prep software? Sure, those numbers are crunched for you but the machine has no idea if you’re actually typing in the correct numbers to begin with. Slow down your efforts just enough to ensure you’re entering the correct data and you can save yourself weeks or months of wasted time in the land of audits.
Hand-writing your return
Unfortunately, there are no bonus points awarded for going “old school” when it comes to filing your tax return. In this tech-driven age we live in, it’s no longer widely accepted to hand-write your return. While this is one of the smaller audit triggers, why give the IRS any reason to suspect your return? Even if you don’t want to pay for tax software, you can still download forms that can be filled out on & printed from the computer. This is an easy way to prevent an audit!!
Giving, giving, and giving some more
It’s certainly a great to give back to charity whenever possible, but it’s not acceptable to fudge, inflate, or fabricate those numbers when it comes time to do your taxes. Even if you’re simply donating old clothing to Goodwill, if you claim your donation to be over $250 in value, you best be prepared to have an itemized receipt showing the figure (bonus points for also including photos, which I always have just in case). The IRS will look at your donation-to-income ratio; claiming to give away half of your income when you make less than $50K is a sure-fire way to raise the auditing eyebrows.
Filing a business return
If you are a sole proprietor/small business owner, be prepared for increased tax scrutiny. Expense to income ratios are reviewed with fine-tooth combs, businesses are questioned as being merely hobbies, and anyone who already has a stable income from other work are all pieces of the business filing puzzle. There are many, many more so make sure to do your due diligence as well as reporting your income/profits accurately.
Super-sized deductions
This mostly applies to the use of one’s home or car for business purposes, but it can expand to literally 100′s of deductions. A few key points are that in order to deduct your home office or car expenses, your office and car must be used only for business purposes. Therefore, you can’t deduct kitchen expenses just because your desk is built into a nook in that room. Also, make sure to accurately report your mortgage interest and property taxes as those are also hot-beds for audit triggers.
Rental property losses
In order to take these deductions, you must be able to prove that you are actively involved in the management of the property. Taking these types of deductions on top of having a decent, stable income elsewhere raises the auditing eye as much as taking super-sized deductions does.
Taking the Earned Income Credit
Much like the First Time Home-Buyers Credit of a few years ago (which I was able to take advantage of when purchasing my condo…wahoo!), there is a great deal of fraud surrounding the EITC. By all means take the credit if (and only if) you qualify, but know that this may potentially cause a greater likelihood of being audited.
Under-reporting income
This is more for those of us who receive 1099s as those are the most commonly under-reported sources of income. This one fascinates me in particular because I can’t understand why someone would risk this given there’s an actually document floating around out there reporting your income and the entity that paid you is also reporting it!
Flapping your gums
Did you know that the IRS has a Whistleblower Program that awards up to 30% of any extra tax/penalties to the person who turns in a tax cheater? Did you also know that the majority of cases originate with a friend, close colleague, or family member turning someone in? While you shouldn’t be trying to cheat the system in the first place, you surely shouldn’t be running your mouth about doing so if you choose to cheat on your tax refund.
Failing to file
Yes, it can be daunting to be faced with a huge tax bill. But when you realize that penalties and interest begin accruing immediately after the filing deadline of any given year, you shouldn’t ever opt to simply not file. Instead of sticking your head in the sand and praying for this tax nightmare to disappear (which it never will because the IRS will hunt you down even if it takes them 10-15 years to do so), figure out your options. Get a filing extension, sign up for a payment plan; do whatever it takes to avoid additional taxes, fees, and eventual wage garnishment.
Past audit experience
Unfortunately, if you’ve been audited in the past, you’ll likely remain on the IRS’ hot list for years to come. Brace yourself for extreme scrutiny of your returns for at least 3-5 years following the year of your audit.
Being part of the 1%
This is one of the areas where being rich isn’t a great thing. Simply stated, the more you make, the higher the likelihood you’re going to be audited, especially in recent years.
Hiring a shoddy preparer
If you’re paying someone to do your taxes for you, that isn’t a green light to simply sit back and wait for your refund. If that person isn’t asking for necessary documentation or asking you questions, you should be leery of their ability to correctly file your return. Unless they’ve known your/your family for decades and are privy to every bit of your financial information, you should be taking part in an interactive conversation about this year’s return. You’ll surely stress a lot less if you spend time answering your tax prep professional’s questions rather than the tax man’s!
Failing to file has to be one of the dumbest mistakes a person can do. You expose your self to some serious fines and litigation by not filing your taxes.
I wish I knew some tax-cheaters!! I would sooo tattle. :p
Filing taxes in the US is so different to filing taxes here in Barbados. Some things are similar but the overall system is supremely different. In comparison, I much prefer my own system. For one thing, we have a fully online filing system, I think this might be the last year you can submit paper copies with your income tax because the government wants to completely phase it out.Our equivalent to the t4 slips are available online even before our employers give them to us so it makes it possible for you to file even earlier.I can understand people making mistakes, what I can not understand is people who try to purposely cheat the system.
These are a lot of mistakes, and everybody needs to avoid making them at all cost. The IRS doesn't play games, and neither should we.
Couldn't agree more!! It's definitely something that boggles my mind, but I could understand how someone could get to a point where they feel that desperate/paralyzed…
Haha…thanks for making me laugh–definitely needed today!
Thanks for sharing a bit about your country's system; I love learning new things (especially when related to $$)!
Exactly! And if you lose the game, you lose a lot of extra, hard-earned $$, too!
I like to figure out mine by hand before I use a software program. Helped me to catch a transposed number entered online which would have resulted in a higher refund than I was due.
Such a smart idea; thanks for sharing!!
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