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 seven that should be on your radar.
Tax missteps that will get you audited
Tax missteps that will get you audited
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 of the returns that person prepared for the year, or for the past several years.
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
Experts generally agree that claiming excessive charitable contributions and claiming a home office are two of the 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.
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 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, according to experts. The EITC is a benefit designed for low-to moderate-income working people, particularly those with children.
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.
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.
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 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 $66,000, you can find free online tax prep through the IRS Free File program.
The American Opportunity tax credit, which replaced the Hope Scholarship credit in 2009, covers more years of college and offers bigger, better benefits to more taxpaying students or their families. Here's how the American Opportunity tax credit and Lifetime Learning credit, another helpful education tax credit, can help offset the rising cost of attending college.