Getting audited isn't the end of the world, and its not impossible to come away unscathed when you have to sit down with the tax man and defend your return.
But it's far better not to get audited in the first place. To minimize your chances of getting a surprise letter from the IRS, here are five things to do when you file your tax return this year.
The easiest way to get on the wrong side of the IRS is by making simple math mistakes. Tax software will handle a lot of the math for you, but you can still make data-entry errors. If you do your returns by hand, check your calculations twice before you write in your final answer on your 1040.
The IRS looks for patterns from your taxes and notices when things change. So if your income or deductions have changed dramatically this year, be especially careful to get all your facts straight and be able to back them up. In particular, unusual items like casualty losses, high medical expenses, and rental property income and expenses often trigger scrutiny. In those cases, you may want to attach your supporting documentation with your 1040 to head off a potential audit before it even happens.
Business owners and the self-employed get a lot of attention from the IRS, which looks hard for red flags among claimed business expenses. One long-time red flag has been the home-office deduction, although a new proposal to simplify that deduction may make it easier and safer to take a write-off Still, for solo businesses and others who use Schedule C to report business income, keep your deductions well-supported and records of your income well-organized, with separate accounts for business and personal funds.
Tax forms that are filed on paper have a much bigger error rate than electronically filed returns, with 2010 figures reporting 21 percent for paper returns versus just 0.5 percent for electronic returns. Neatness and automatic calculations make e-filed returns more accurate and less likely to raise concerns.
If a bank, broker, or other financial institution gets a number wrong on a tax form you receive, don't just fill in the right number on your return. Get your financial institution to correct their mistake, or else the discrepancy could cause an IRS computer to flag your return.
Cashing out or taking a loan on your 401(k) are two viable options if you're in need of funds. But, before you do so, here's a few things to know about the possible impacts on your taxes of an early withdrawal from your 401(k).
The IRS considers unemployment compensation to be taxable income—which you must report on your federal tax return. State unemployment divisions issue an IRS Form 1099-G to each individual who receives unemployment benefits during the year.
Say you happily filed your tax return by the end of February and were the envy of all your friends, but in June you realized you forgot to include income from last summer's freelance job. Don’t worry, all you need to do is file an amended return using Form 1040X.