Yahoo Finance 7 Tax Mistakes That Could Land You in an Audit
The chances of getting audited are slim for most taxpayers, but that doesn't deter many people from being terrified of the prospect.
"There's the audit lottery," says Mike Campbell, a certified public accountant and tax partner with BDO USA. "There could be nothing in particular that causes the audit."
However, there are also things taxpayers do that could land them in an audit. Here are seven tax mistakes to avoid.
1. Making simple errors. From incorrect Social Security numbers and math errors to forgetting to attach necessary forms, there are several simple mistakes that could result in a return receiving increased scrutiny from the IRS. In many cases, the system will automatically kick out a notice requesting clarification. However, there is always a risk that these errors could flag a return for a manual review by IRS staff. "You don't want someone to actually look at your return because then they might think, 'well, I'll look at other things too,'" says Paul Gevertzman, a certified public accountant and tax partner at accounting firm Anchin, Block and Anchin in New York City. Once that happens, the chance of an audit can start creeping up.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
2. Omitting income. The IRS relies on an automated system to move through tax returns quickly. "The great IRS computer in the cloud processes [returns] and begins looking for things," says Manuel Pravia, a certified public accountant and principal in the tax and accounting department at MBAF in Miami, Florida. Part of the process involves matching up data submitted by employers and financial firms on W-2 and 1099 forms with the information on a taxpayer's return. When the numbers don't match, that can trigger an inquiry from the IRS. While it may seem harmless to leave off the $20 interest received from a bank account, it could mean a return will garner a closer look from the government.
3. Claiming a loss on a hobby business. Business losses in general can raise a taxpayer's audit profile, but experts say you shouldn't shy away from claiming legitimate deductions. However, they caution against deducting losses from what may be considered a hobby business. "Sometimes people claim things the IRS wouldn't consider a real business," Gevertzman says. You may want to consider the size of the loss and whether the increased risk of an audit is worth the deduction. For instance, if a couple has one high-income spouse and the other has a small business loss, Gevertzman says it could be best to leave the loss off the return.
4. Not being strategic with deductions. "If you're wealthy, your chances of getting an audit [go] way up," says Peter Lang, founder and president of Lang Capital in Hilton Head, South Carolina. Individual taxpayers were audited at a rate of 0.8 percent, according to the IRS 2015 Data Book. However, once income exceeds $200,000, the audit rate jumps to 2 percent. Earning a healthy income isn't a mistake, but not minimizing your taxes by using deductions is a misstep, Lang says. Those who are near the $200,000 mark should make sure they are maxing out their contributions to a traditional 401(k) plan or health savings account, if applicable.
[Read: 9 Tax Changes to Know Before Filing Your 2016 Return.]
5. Inflating your charitable donations. Being strategic about deductions is smart, but inflating numbers is a mistake that could result in an audit. "Generally, what causes someone to be audited is to fall outside the expectations of their tax bracket," says Valrie Chambers, an associate professor of accounting at Stetson University. One of the areas ripe for exaggeration is charitable donations, particularly donations of goods to nonprofits. Although these are legitimate deductions, claiming significantly higher donations than others in your tax bracket could trigger an IRS inquiry or audit.
6. Deducting too much mortgage interest. Another deduction people may get wrong is the amount of mortgage interest they claim. Only interest paid on the first $1 million of a mortgage is fully deductible. People may think they can get away with claiming all their interest and the IRS will never be the wiser, but Campbell says that's a mistake. "That's an easy thing for the IRS to flag," he says. "[They] know what the prevailing interest rates are." Taxpayers claiming more interest than what would be normal at current rates should expect to get a letter from the IRS requesting further information.
[Read: How Saving in an IRA Can Reduce Your 2016 Tax Bill.]
7. Failing to have proper documentation. For many of the above mistakes, the IRS will often issue a notice requesting additional information. Responding with the proper documentation can quickly resolve the issue, but failure to do so could result in greater scrutiny or even a full-blown audit. "If it's not on a piece of paper, it doesn't exist," Pravia says. That makes this the biggest mistake of all. An audit can be an uncomfortable experience, but without paperwork to document information on a return, it can quickly become a nightmare. While taxpayers should avoid all of the above tax mistakes, Pravia and other tax experts say having the right documentation in your files can go a long way toward making things right again.
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