While the fear of an audit is quite real, the reality is not nearly as scary as you’d think. In fact, the rates at which the IRS audits tax returns is quite low. In fiscal 2018, the IRS audited just 894,000 of all individual returns. While this sounds like a lot, it was just 0.59% of the total number of returns filed. And that was down from the 0.62% in fiscal 2017.
But just because you get a letter from the IRS is no reason to worry. In fact, according to the IRS, many returns are selected through a “random selection and computer screening” process. If you do get a notice, it doesn’t mean you did anything wrong. So it’s important to stay calm.
At the same time, there are certain triggers that can increase your odds of being audited. Avoiding these triggers can help you to reduce your chances and avoid an audit.
Reporting income. One of the surest ways of being audited is if the income you claim doesn’t match what your employers report. So, whether you have one job and receive a W-2 or you freelance and you get a 1099, even if you’re paid in cash, report all your income from all sources.
Entering information. Be careful and triple check your answers and it could help you avoid more scrutiny than you deserve. It’s also important to make sure you have proof of all your deductions just in case the IRS asks.
Home office. If you use part of your home as a dedicated office to run your own business, deducting that portion of your rent or mortgage can take a lot off your taxes. So, the IRS gets interested. Make sure you meet the requirements for a home office. They can be pretty strict.
Charitable deductions. It’s fine to be generous and support causes that matter to you, but if you seem overly generous to a lot of charities, the IRS may get curious. Remember to keep receipts for your contributions with your tax return.
Small business losses. If you file a Schedule C for your small business and you report losses for three out of any five year period, the IRS is going to want to take a second look. If you can’t prove the losses were part of the usual start-up years for your type of business, and you don’t have a business plan to address the losses, the IRS will change your business income to hobby income. And you can’t take losses for a hobby.
While it’s certainly a little frightening to get a letter from the IRS, remember that you may have more control than you think. Because it matters which supporting documents you keep. And, if you get your return prepared by Jackson Hewitt®, you could also get the reassurance of their Lifetime Accuracy Guarantee, FREE IRS Audit Assistance, and for an additional fee, Platinum Worry-free Guarantee.
That way, you can really breathe easy.