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 of your tax returns.
However, you can sharply reduce the odds of an IRS inquiry by avoiding some common mistakes when filing your taxes. Here are several that should be on your radar.
Hiring the wrong tax preparer
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 might 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.
Saying your hobby is a business
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, if you do that for several years, the IRS is going to get suspicious. A business is something that makes money. Generally, if you haven’t made money in at least three of the past five years, what you have might actually be a hobby.
The IRS doesn’t allow business deductions for hobbies.
Taking questionable deductions or credits
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.
Take a home office if you’re entitled to it, but be ready to defend it if necessary. The most important thing to remember is that you can only deduct a home office if you use that space primarily and exclusively for business.
Under the category of credits, abusing the Earned Income Tax Credit (EITC) is likely to get you in trouble. The EITC is a benefit designed for low- to moderate-income working people, particularly those with children.
Claiming a loss from a rental
When housing prices were depressed, some people converted homes into rentals rather than sell them. Those who found that the rent they received didn’t cover their mortgage and taxes might have assumed they were entitled to take a deduction for the losses.
Not so fast. You must 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. Also, check out “10 Keys to Finding and Owning a Perfect Rental Property.”
Failing to claim all your income
Thinking you can keep secrets from the IRS is a mistake:
- You might 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 might 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 might 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 U.S., the IRS knows.
Don’t take the chance of getting caught in a lie. Claim all of your income. Then, the IRS won’t have any discrepancies to note, giving it one less reason to flag your return for an audit.
Making 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 $69,000, you can find free online tax prep through the IRS Free File program.
Other sources of help include:
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