Audits are used by the government take a closer look at personal and business income to verify what was reported is accurate. There are certain red flags which will increase your chances of being audited such as claiming excessive deductions or misreporting personal expenses as being business related. Keep the following tips in mind when filling out your taxes and hopefully you can minimize the chances of an audit.
As individuals and businesses make more money their chances for being audited increase significantly. The belief is that with more money at stake there is an increased likelihood of claiming inappropriate deductions or making excessive charitable contributions. Of course, make as much money as you're able but keep diligent records and consult with professionals if your taxes get complicated.
It is important to report all income regardless of where it came from or how much it is. Anything over $600 is reported to the Internal Revenue Service on a Form 1099. If you work in a cash only business and are self-employed your chances of being audited increase due to the likelihood of non-reporting of income.
Generally speaking you are safe when working with various tax professionals and tax prepares. If however, the person or business you work with is audited by the government then it is likely that all of their customers will be audited as well. Thoroughly vet who you're working with by checking references and with the Better Business Bureau.
Any inconsistencies between your federal tax return and state return is also likely to raise a red flag. It can be something as simple as a transcription error or misplaced entry but it can also be fraud. Double check all information prior to filing your taxes to ensure everything matches between your federal and state tax returns.
Filing electronically significantly lowers your chances of being audited as stated by the Internal Revenue Service. By submitting your taxes electronically, it decreases the likelihood of errors, guarantees your taxes are received on time and expedites your refund. Given all of the benefits there's really no reason everyone should not using the free eFile system.
The Earned Income Tax Credit or the EITC is available to all moderate to low income working individuals and families as a refund even if they did not file taxes. For the 2011 tax year, 27 million individuals received $62 billion from the EITC which leaves it open to abuse. If you qualify, it is in your best interest to take advantage of this credit just ensure that you actually qualify or it may raise a red flag.
Excessively large charitable deductions claimed on personal tax returns will probably raise a red flag with the IRS. Certain requirements must be met and charitable deductions cannot be more than 50% of your reported adjusted gross income. Claim the deduction if it is appropriate but verify with provided online IRS resources to make sure.
A common mistake many individuals make is trying to claim a personal hobby as a viable and profitable business. If your small business is not profitable at least 3 out of 5 tax years you will probably be audited. This is to determine whether or not you are claiming business expenses appropriately. Claiming a home office, depreciating equipment and writing off other purchases are items which will raise red flags if your "business" isn't profitable.