Many people view the IRS as this big powerful monster who can garnish your wages and seize your assets. The reality is that IRS audits rarely happen. Out of the 196 million returns that were filed last year, only 0.5% were audited. The best way to stay out of trouble is to learn the red flags.
Earning a lot of money
Outside of people who report no adjusted gross income (AGI), nobody gets more attention from the IRS than high earners. In fact, the more money you make the greater your chances of being audited. According to the 2018 IRS Data Book, individuals with an AGI between $25,000 and $50,000 were audited at a rate of 0.48 percent. The rate increases to 1.10 percent for those with an AGI between $500,000 and $1 million. If you manage to rake in over $10 million the odds jump to 6.66 percent.
Failing to report all your income
When you receive copies of your W-2s, 1099s and other tax documents, the IRS does as well. So, don’t try to be slick and omit information when you do your taxes. If what’s reported on your return doesn’t match IRS records, you better believe you’ll be hearing from them.
Making math and clerical errors
You’re sadly mistaken if you think math and clerical errors are no big deal. Last year, the IRS identified more than 2.4 million math errors on tax returns. As a result, nearly 2 million taxpayers had to be notified. If you know math isn’t your strong suit, use tax software like ezTaxReturn.com to prepare your return. They make life easy by doing the calculations for you.
Claiming the Earned Income Tax Credit
The EITC was designed to help hardworking Americans who earn less than $54,884. Be sure to double and triple check your entries when claiming the credit because it’s known for tripping people up. For tax year 2017, 7.1 percent of math errors that occurred were attributed to the EITC. Returns claiming the credit also have a higher chance of being audited due to the high rate of false claims.
Taking the home office deduction
There’s nothing wrong with claiming the home office deduction if you truly deserve it, but make sure you’re clear on the rules. The room must be regularly and exclusively used for your business. It must also be your businesses primary location. If the space is sometimes used as your guest room or playroom for your children, then you cannot claim it on your return.
Receiving an early distribution from your IRA
When you don’t have any savings sometimes you have no choice but to tap into your IRA when emergencies pop up. If you’re younger than 59 ½, you’ll pay a 10% early withdrawal penalty unless you qualify for an exception. For instance, you can avoid the penalty if the money is used to pay for college or you took up to $10,000 to buy your first home. The IRS has a whole list of exceptions for you to choose from. Just make sure it’s legit otherwise you may find yourself sitting in an audit.