Here’s why the IRS would want to audit your taxes
After you file your taxes — this year by July 15 because of the coronavirus pandemic — you probably don’t want to think about them again until the next year. But if you’re too aggressive with certain deductions or credits, that could trigger an audit from the Internal Revenue Service (IRS).
If you get an IRS notice — official correspondence will only come through the mail — you should respond promptly with the requested documentation like bank statements or donation letters from charities.
Tax deadline postponed: Why you should still file as soon as you can
Typically, if your taxes are under review, the IRS will first request more information by mail. For instance, almost three out of four of the agency’s tax reviews in tax year 2018 were conducted by mail rather than in person.
You may also benefit from an audit. Almost 30,000 of the 1 million tax return reviews for the 2018 tax year resulted in additional refunds to Americans, totaling over $6 billion.
Here are the most common reasons the IRS may audit you.
If you’re a gig worker or contractor and don’t include income from those jobs, the IRS will notice the missing income. In most cases, the agency gets copies of the W-2 and 1099 forms from companies that you worked for. The IRS uses that information to compare with your return. If it doesn’t match up, that will trigger a review.
Certain deductions can be inflated, so the IRS keeps an eye on those. For example, it’s easier to overstate charitable donations because the agency doesn’t receive documentation on your contribution from the nonprofit.
But the IRS depends on statistical algorithms to determine if your deductions make sense based on your total income. If those deductions are too high, the agency may ask for documentation, such as a letter from the charity showing your contribution, to support your deduction.
You might need to report a foreign financial account — say, a bank account, brokerage, or mutual fund — when you file your federal taxes.
You must file Form 8938 if the total value of your foreign assets is more than $50,000) for single taxpayers or those married filing jointly) or $100,000 for joint filers on the last day of the tax year. You also must file if the total value of your foreign assets is more than $75,000 for single taxpayers or those married filing jointly) or $150,000 (for joint filers) at any point during the tax year.
Those who make more than $1 million are more likely to get audited by the IRS.
For example, the IRS reviewed 0.59% of all individual tax returns for the 2018 tax year. That rate almost doubled to 1.1% for taxpayers reporting $500,000 to $999,999 in income, 2.21 % for taxpayers reporting $1 million to under $5 million, 4.21% for taxpayers reporting $5 million to under $10 million, and 6.66% for taxpayers reporting $10 million and more in income.
Only one person can claim a child as a dependent, even if the parents don’t file taxes together. This can be even more complicated if another adult, such as a grandparent or older sibling, also helps support the child.
If more than one person claims the child, then that will likely prompt a review from the IRS, even if it was an honest mistake.
To claim a child as a dependent, the child must be 18 or younger and live with you for more than six months of the year. There are exceptions for older children who are full-time students. Divorced parents should consult the “tie breaker rules” from the IRS to determine who should claim the child.
It’s easy to take advantage of reporting business income and deductions on Schedule C, to your benefit. So, the IRS looks for the following red flags on the form:
More deductions than profits
Round numbers for income and expense values
Too many consecutive years of business losses
100% deduction for business expenses that are often personal expenses like car or cell phone
That’s why it’s important to save documentation that backs up those business expenses in case your taxes come under review.
Janna is an editor for Yahoo Money and Cashay, a new personal finance website. Follow her on Twitter @JannaHerron.
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