Tax Hacks 2016: How to Avoid an Audit

Photo (cc) by dizznbonn

Nobody wants an IRS tax agent knocking at the door and asking for a shoebox full of receipts. Unfortunately, there’s no surefire way to avoid an audit.

However, you can sharply reduce your odds of an IRS inquiry by avoiding some common mistakes when filing your taxes. Here are seven that should be on your radar.

1. Hiring the wrong tax preparer

251068799_a9122c5bf3_b

This mistake might occur before you even get your name on the tax return. Select a tax preparer who is incompetent or unethical, and he or she could spell big trouble for you.

If the IRS audits one of the returns the tax preparer filed and finds significant problems, the agency could decide to audit all the returns that person prepared for the year, or for the past several years.

Don’t make this mistake. Read our advice on how to select the best tax pro.

2. Saying your hobby is a business

3862646659_ed2e441445_b

Let’s say you breed and sell dogs, or sell blankets on Etsy, or resell garage sale purchases on eBay. At the end of the year, you realize expenses exceeded what you made and decide to deduct a tax loss from your “business.”

However, do that for three or more years and the IRS is going to get suspicious. A business is something that makes money. If you haven’t made money in three years, what you have may actually be a hobby.

The IRS doesn’t allow business deductions for hobbies.

Click here and learn to slash your taxes with our new tax course!

3. Filing certain schedules or forms

3326004018_15f98423a8_b

You might say the third item on our list isn’t a mistake because, in many cases, there is no way to avoid it. For example, if you have a business, you need to file a Schedule C. And yet filing a Schedule C increases your chances of an audit.

However, it would be a mistake to file a Schedule C if you have an unprofitable business that is more like a hobby. It might also be a mistake to file a Form 5213 if you’re not sure.

Form 5213 prevents the IRS from auditing you for the first five years of your business, and it is typically used when transitioning a hobby into a business.

This form allows you to claim losses from your hobby-turned-business, no questions asked. That is, until the five years are up, and the IRS comes calling to see what you’ve been up to.

4. Taking questionable deductions or credits

11905103105_db57921195_k

Experts generally agree that claiming excessive charitable contributions and claiming a home office are the two deductions most likely to raise red flags with the IRS.

If you donate a large percentage of your income to charity, be sure to keep careful records. Too many contributions, relative to your income, can be a problem. So think twice about inflating the value of those items you dropped off at the thrift store.

Keep careful records of all donations and be sure to get a written acknowledgement from any charity to which you donate $250 or more per year.

As for the home office, take the deduction to which you’re entitled, but be ready to defend it if needed. The most important thing to remember is you can only deduct a home office if you use that space exclusively for business.

Under the category of credits, the Earned Income Tax Credit is most likely to get you in trouble, according to experts.

Back in 2013, the IRS came under fire for not taking enough action to curtail improperly awarded Earned Income Tax Credits. In a statement reported by multiple news outlets, the agency fired back by saying EITC claims were twice as likely to be audited as other returns. If you claim the EITC, consider yourself warned.

5. Claiming a loss from a rental

7004000349_330c36eb1c_h

When housing prices were depressed, some people converted homes into rentals rather than selling them. Those who found the rent didn’t cover the mortgage and taxes may have assumed they were entitled to take a deduction for the losses.

Not so fast. You have to either be an active participant in the management of your rental or a real estate professional to do that. The IRS has a long and confusing page with the details, but Nolo.com has a much clearer explanation.

Make sure you’re eligible to deduct the losses before doing so.

6. Failing to claim all of your income

8266136492_69714071c7_k

Thinking you can keep secrets from the IRS is a mistake.

You may think the government won’t know about the money you earned freelancing on the side, but if the company you worked for files a 1099 form, the IRS knows.

You may think you can keep your alimony checks a secret, but if your spouse is reporting those payments on his or her return, the IRS knows.

You may think the interest you earn from foreign bank accounts is between you and that country’s bankers, but if those nice bankers are sharing information with the United States, the IRS knows.

Don’t take the chance of getting caught in a lie. Claim all your income. Then, the IRS won’t have any discrepancies to note, giving it one less reason to flag your return for an audit.

7. Making math errors

13369027524_66ce5e0ffc_h

The last mistake on our list is also the simplest mistake to avoid: math errors.

If you can’t add and subtract correctly, the IRS might start wondering what else you got wrong in preparing your return. Avoid this audit trigger by using tax software or an online program that will virtually ensure the calculations are correct. If you earn less than $62,000, you can find free online tax prep through the IRS Free File program.

What’s your experience with the IRS? Share in our comments section below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
3 Cable TV Companies Hiking Prices for 2021
3 Cable TV Companies Hiking Prices for 2021

Still married to your cable company? Hold on to your wallet!

12 Ways to Never Pay Full Price for Anything
12 Ways to Never Pay Full Price for Anything

Stop paying retail prices. Here are plenty of ways around that.

14 Service Providers Most Likely to Lower Your Bill If You Ask
14 Service Providers Most Likely to Lower Your Bill If You Ask

With these companies, it might be easier than you think to negotiate your monthly bill down.

5 Surveys For Money Sites To Get Paid For Your Opinion
5 Surveys For Money Sites To Get Paid For Your Opinion

Yes, you can earn extra cash by taking online surveys. But some websites are better than others for this. Here are a few of our favorites.

The Annuity Everyone Needs — and Anybody Can Get
The Annuity Everyone Needs — and Anybody Can Get

This simple strategy can put more money in your pocket during retirement.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Vacuums from this brand can last a half-century, if not longer — and they’re hot on the resale market.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

36 Things That Will Be Obsolete Soon
36 Things That Will Be Obsolete Soon

The writing is on the wall for dozens of things we have grown up with.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

8 Federal Income Tax Breaks for Homeowners
8 Federal Income Tax Breaks for Homeowners

Some of these deductions and credits are available to a wide swath of homeowners.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

10 Types of Retirement Income That Are Not Taxable
10 Types of Retirement Income That Are Not Taxable

There are lots of things Uncle Sam can’t touch — so long as you play by the rules.

10 Deep Discounts Available on Amazon This Friday
10 Deep Discounts Available on Amazon This Friday

These items are steeply discounted — but the deals won’t last long.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

5 Products You Should Never Buy Generic
5 Products You Should Never Buy Generic

Sometimes the brand-name version is clearly superior.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.