Tax Returns and How Not to Get Audited

Carefully Prepared Tax Return

We are once again in the dreaded tax filing season where we work on filing our tax returns hoping that we never get that letter from the IRS tax office telling us we are being audited. This happened to me many years ago when I had done my own taxes so I had no representation of a CPA or tax attorney and it was awful. I thought I had been careful, but they are quite particular, so let’s cover the red flags that will help you avoid an audit. The latest figures from IRS state in 2008 a total of 198,905,847 tax returns were filed and 1,578,444 tax returns were audited. About 1.5% of all taxpayers are audited.


Tax Audit Sign

source Flickr
source Flickr

IRS Letter May Not Mean Audit

First, don’t panic if you receive a letter from the IRS as most letters involve minor issues such as an arithmetic error and the IRS may owe you money, or you may owe the IRS a minor amount of money and interest which is currently 4%. The rate is recalculated every three months. Most letters are due to simple human error. For instance, each year more than 1 million letters are sent out because people forgot to sign their returns.

What can you do to not wave those red flags that might cause you to be audited?

First, the IRS has decided this year to focus on those individuals that earn more than $100,000 annually. For years the IRS has been cracking down on abuses by the wealthy, partially because the abuses have been so flagrant. For example, in 2006, 8,252 returns with incomes of $200,000 or more showed no income tax liability. They can afford expensive tax attorneys who find loopholes in the tax code but it is not legal and tax evasion can land you in jail. This is very disgusting to those of us who don’t make that kind of money and still follow the law by paying our taxes. People who are in business for themselves also have higher odds of being audited.

RS Audit Statistics

IRS Tax Returns ----Returns Filed -----Returns Examined ----% Examined

Less than $25,000 -----59,211,700 ------1,076,945 ----------.81%

$25,000 to $50,000 ----27,263,000 -------259,794 . ----------58%

$50,000 to $100,000 ----17,019,200 ---------196,852 . -------62%

Greater than $100,000 --4,540,800 -------129,320 ---------1.66%

Several Common Ways of Triggering an Audit

Not claiming all of your income.

Make sure you include all of your income; yes even your income from Hubpages. Remember to include proceeds from stocks and bonds that you have sold, including dividend income, brokerage and bank accounts and any other investment where you have earned dividends or interest. If you are someone who claims earned income credit which is a tax break for lower income individuals must be accurate as there are strict guidelines. You qualify if you have one child and your adjusted gross income is less than $33,241. If you are married and filing jointly without children or with one child you must have earned less than $37,783.

Reporting business losses:

Reporting a small business loss puts you in a higher possibility of being audited. If the loss is $5000 - $10,000 this is a red flag to the IRS. If you have given a tax donation of less than $250 you will need a statement, and if you gave more than $250 to a charitable organization you need a written letter for proof. If you’ve given household goods or clothing to a charitable organization you will also need a letter which includes a description of the items.

Using home office deductions:

Apparently the IRS thinks this is an area often abused but you are entitled to claim home office expenses. You will need to prove that the home office is the primary place of the business, used for business meetings with customers or clients and the area you claim must be used exclusively for business

Write offs being higher than normal:

There is nothing wrong with claiming legitimate write offs as long as they are not outrageously high compared to your income. If the IRS notices the write offs are disproportionately high compared to your income you will likely be audited. So if you have a lot of deductions make sure you can back them up with the proper paper work

Internal Revenue Service

source IRS
source IRS

Other Red Flags for the IRS

  • Claiming tax shelter investments losses on your tax return.
  • When you own or work in a business which receives cash and/or tips in the normal course of business.
  • Large business expenses in relation to your income on your tax return.
  • Rental expenses on your tax return.
  • A prior IRS audit that resulted in a tax deficiency.
  • An informant has given information to the IRS.
  • People with their own businesses often get audited over claimed mileage. You must keep a daily log, ideally a notebook in your car and write down all business related mileage when you are also using that car for personal use some of the time. This is also true for people who claim medial mileage.
  • If you owe back taxes contact the IRS and make an offer and compromise so you have a payment plan that your can live with.  They will usually work this out with you.

What Happens When You File Your Return?

What happens once you file your return? “IRS computers compare it against the national Discriminate Information Function (DIF) system average. The IRS calculates the DIF score by using a closely-guarded formula. Tax returns with the highest DIF scores are scrutinized by experienced IRS examining officers who determine which tax returns provide the best chance for collecting additional taxes, interest, and tax penalties.”

Avoiding the Dreaded Tax Audit

Summary

To avoid an audit certainly report all your income and all your expenses as long as you can back them up with documentation.  Carefully double check your math.  Be sure and sign your tax forms and good luck.  

Tax Audits

Have you ever been audited?

  • Have you ever been audited and owed money?
  • Have you ever been audited but didn't end up owing money?
  • I have never been audited.
  • I was audited and it was the worse experience of my life.
See results without voting

© 2011 Pamela Oglesby

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Comments 45 comments

Partisan Patriot 5 years ago

Pamela

Great hub; however you left out one important sure fire way to avoid an audit; go to work for the Obama Regieme; not only will you be exempt from an audit you won't have to pay taxes at all!


DiamondRN profile image

DiamondRN 5 years ago from Charlotte, NC USA

I've had a couple of audits related to my stock trading activities and one to a higher than normal percentage of charitable donations. I keep good records, so they have mostly been a nuisance. I haven't wound up owing any more taxes as a result. The key, like you mention in your article, is doing your homework and being able to substantiate every penny of your claimed deductions, Pamela.


Pamela99 profile image

Pamela99 5 years ago from United States Author

Patriot, Yes I remember the Geitner situation and he still got the job, then there is Randall who is asking the public for money to pay his debts. Thanks for your comments.

Diamond, It sounds like you are right on top of things which is most important. Thanks for sharing that information.


rpalulis profile image

rpalulis 5 years ago from NY

I am so glad I have someone do my taxes. I just make sure I save and report everything, then neatly present it to my accountant. I would hate to get audit sounds like a real pain.


Pamela99 profile image

Pamela99 5 years ago from United States Author

rpalulis, I think it is good to have an accountant if you have anything more than a simple return. Thanks for your comments.


Simone Smith profile image

Simone Smith 5 years ago from San Francisco

I think this is the best explanation of auditing and avoiding audits that I have ever read. I am glad you've shared what you've learned from both research and personal experience with us - this will serve as a fantastic guide to a lot of people, I'm sure!


Pamela99 profile image

Pamela99 5 years ago from United States Author

Simone, I certainly appreciate your comment. I hope it does help others.


anglnwu profile image

anglnwu 5 years ago

I'm glad I've someone to do my taxes, so I don't have to worry as much. Thanks for the very informative hub. Rating it up.


Pamela99 profile image

Pamela99 5 years ago from United States Author

Anginwu, I appreciate your comments.


FitnezzJim profile image

FitnezzJim 5 years ago from Fredericksburg, Virginia

I too have someone do my taxes, so usually don't worry about it. The amount I pay the preparer (who even comes to my house) reduces the forms to a simple matter of collecting the data that matters and letting them do their job. No hassle, no worry, no time spent trying to figure out what all the legalese means. It gives me time to go do more entertaining and less stresful things, and keeps my hair from getting gray.


oceansnsunsets profile image

oceansnsunsets 5 years ago from The Midwest, USA

Thanks for sharing this great hub, full of information on how to not get audited, Pamela!


Pamela99 profile image

Pamela99 5 years ago from United States Author

Jim, It sounds like you are right on top the games. Thanks for your comments.

Oceansnsunsets, I appreciate your comments.


Support Med. profile image

Support Med. 5 years ago from Michigan

Thanks for this info. Will keep as a reference. Glad you made it through. As I once heard someone say, 'There are 3 things you do not want to mess with, the I the R and the S." Voted/rated.


Pamela99 profile image

Pamela99 5 years ago from United States Author

Support med, That's so true. Thanks for your comment.


akirchner profile image

akirchner 5 years ago from Central Oregon

Cool info, Pamela - we found one of the best things to do when being audited (we were audited by the state in our business years and years ago) is to have all your records precisely compiled and just be honest. The gal who came to audit us was totally blown away by Bob's record keeping and found nothing amiss....whew! I always thank him for being so good about the books! We have friends who've opened businesses and said 'what's the big deal...just skim off some money - who'll know...you don't account for everything do you?'

Ha! That's one thing we certainly do! We've always felt that paying our taxes was our way of giving ourselves good luck and not getting a monkey on our back!


Pamela99 profile image

Pamela99 5 years ago from United States Author

Audry, I think you have the right idea and your husband sounds very well organized which is nice for your. Thanks for your comments.


katiem2 profile image

katiem2 5 years ago from I'm outta here

I sure don't want to get audited. I have a friend who's an auditor and does he ever work a lot of hours. It's amazing the depths they go into the detail, every single detail.

Thanks for your very pratical and helpful tips on filing and avoiding an audit! Well Done! :) Katie


Pamela99 profile image

Pamela99 5 years ago from United States Author

Katie, I appreciate your remarks. I am so careful with all the details also as I don't want another audit. Thanks.


Micky Dee profile image

Micky Dee 5 years ago

I never want that again. Great post!


Bail Up ! profile image

Bail Up ! 5 years ago

Since opening up our business 15 years ago I have used the same financial service who operates an H & R Block. If by chance we ever get unlucky and get audited they will handle the audit. good record keeping and a good accountant is definitely a must.


Pamela99 profile image

Pamela99 5 years ago from United States Author

Micky Dee, Me either. Thanks for the comment.

Bail up, You are absolutely right. Its good you are set up so well. Thanks for your comments.


TINA V profile image

TINA V 5 years ago

Nobody wants to get audited by the IRS. I'm glad that a credible Accounting firm does our filing of taxes. But these are useful tips especially that this is now the tax season. I'll bookmark this so that I could share it to my friends.


rich_hayles profile image

rich_hayles 5 years ago

In the UK Vodafone (Cell phone network provider) got away with a 6 BILLION pound tax bill, written off practically.

Don't quote me on the exact numbers, but I'm sure that was right.

No doubt if I make a tiny mistake in my math I will get the full force of the law. Complete joke!


Pamela99 profile image

Pamela99 5 years ago from United States Author

Tina, It's nice not to worry by having a good account. Thanks for your comment.

rich_hayles, Thanks for your comment.


Hello, hello, profile image

Hello, hello, 5 years ago from London, UK

Well written hub and I sure very helpful but only for Americans.


Pamela99 profile image

Pamela99 5 years ago from United States Author

Hello, Thanks for your comment.


KoffeeKlatch Gals profile image

KoffeeKlatch Gals 5 years ago from Sunny Florida

Pamela, you have written a clear, concise, and to the point article about avoiding being auadited. Thank you. So many times when writing about this subject people lead you around in circles. Great job.

Voted up and useful.


Pamela99 profile image

Pamela99 5 years ago from United States Author

Sue, I certainly appreciate your comments. Thank you so much. Love and Peace to you.


suejanet profile image

suejanet 5 years ago

Thanks for the information. I will be very careful.


Pamela99 profile image

Pamela99 5 years ago from United States Author

suejanet, I appreciate your comments.


JodiVee profile image

JodiVee 5 years ago

Whew, glad I don't make enough to put me at risk of getting audited. Hey, wait a minute, that's not necessarily a good thing; I want to earn more! lol

http://www.jobvirtue.com


Pamela99 profile image

Pamela99 5 years ago from United States Author

JodiVee, Make more and keep receipts! Thanks for the comment.


Mark Randall 5 years ago

It is also important to make sure that you keep all your tax papers filed and organized. This will not only help you file your normal taxes, but help you in the case of an audit as well. Great hub!


Pamela99 profile image

Pamela99 5 years ago from United States Author

Mark, I know that is true and I do that pretty well. Thanks for adding that advice to the hub. I appreciate the comments.


Silver Poet profile image

Silver Poet 5 years ago from the computer of a midwestern American writer

No one likes an audit. The title attracted my attention. Audits mean extra paperwork, so I guess it's better to do things right the first time!


iverhunt04 profile image

iverhunt04 5 years ago from USA

Very important to work WITH the IRS if you do get audited. My husband and I went through this with something related to his ex-wife and it was a little intense but we got through. We did work with a lawyer, and that helped us have more peace of mind. As we expected, it worked out in our favor thank goodness. Audits do not mean that you have done something wrong. It is good to just make sure you have done what you need to and follow up as required.


Pamela99 profile image

Pamela99 5 years ago from United States Author

Silver Poet, I try hard to do just that. Thanks so much for your comment.

iverhunt, Whether you are right or wrong they are stressful! I'm glad yours worked out well. Thanks for your comments.


iverhunt04 profile image

iverhunt04 5 years ago from USA

Thank you, yes you are right...something about the "power" of the IRS to come in and take your money etc. Just good to stay calm if you do get audited. My dad has his CPA so it has always been helpful to have his insight in approaching my taxes each year.


Pamela99 profile image

Pamela99 5 years ago from United States Author

iverhunt, A CPA is definitely helpful. Thanks for your comments.


BlissfulWriter profile image

BlissfulWriter 5 years ago

I believe the specific rules for "home office deduction" is that the room must be surrounded by 4 walls and the room be used 100% for business. So if you are using the dining room table to do your business, but you also using room for eating dinner, you can not claim that as "home office". Or if you use your home office to store your "non-business clothes", then you can not claim as "home office".

Someone else also had mentioned that "home office" claims are easy red-flags for auditors.

Don't quote me, I'm not a CPA. Just something I heard over the grapevine. Better to ask your tax advisor.


Pamela99 profile image

Pamela99 5 years ago from United States Author

BlissfulWriter, I have been told that home offices are an easy way to get audited. I used the home office as a tax write off for couple of years but it was a specific room that I didn't use for anything else. My CPA told me that was a requirement. Thanks so much for your comments.


istephan profile image

istephan 4 years ago from Los Angeles

Taxation is a crucial span indeed, although escapism is not an answer as we do have our federal dues to pay one or the other way.

It is a nice & informative article though !


Pamela99 profile image

Pamela99 4 years ago from United States Author

istephan, Thank you very much for your comments.


monicamelendez profile image

monicamelendez 4 years ago from Salt Lake City

A CPA does my taxes and I do things right. I'm still scared of getting audited. I'm just afraid that something will be messed up if that happens!


Pamela99 profile image

Pamela99 4 years ago from United States Author

monicamelendez, I think most of us fear an audit and having a CPA helps assure you that an audit is unlikely. I appreciate your comments.

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