Anyone can make a simple mistake: For example, you inadvertently transpose some digits of your child’s Social Security number on your tax return, and within 24 hours after filing, you get a notice from the IRS that your tax return has been rejected.
This is not the same thing as an examination. It’s like any online situation you might encounter where you need to correct the problem and send it back.
That type of simple mistake is why it’s much better to e-file your tax return, as more and more people are doing, rather than by mailing in a paper copy.
If you get a Social Security number wrong on the paper copy, the IRS will correct it for you. However, their way of fixing it in the example above would be to simply remove the child—and his deductions—from your return. Then you’d have to file an amended return if you want to correct the IRS’s “quick fix”.
Here are four red flags you should watch out for on your tax returns this year to minimize the likelihood of being audited:
1. Your numbers don’t match up
An examination or audit may be triggered when reported income or deductions don’t match up with the documents the IRS has on file—W-2s, 1099s, 1098s and so forth.
For instance, if you want to get a tax break on tuition expenses, either under the tuition expense deduction or the lifetime learning credit, the tuition you put in the tax return should match the number on the 1098 that the school sends directly to the IRS.
If there’s a big discrepancy, or no 1098 at all, then a request for more information may be triggered.
“Most examinations for individuals are correspondence examinations,” says Jackie Perlman, principal tax research analyst at H&R Block’s Tax Institute.
“You’ll get a letter from the IRS. Be sure to read it. It doesn’t mean you’re in trouble or that you’re going to jail.”
The taxmen are simply looking for an explanation for the discrepancy.
2. You’re including self-reported information
Perlman says the most “auditable” information on the tax return is that which is self-reported, such as charitable deductions. “The important thing is to keep very good records,” she says. “Be sure you have documents to back up everything you put in the return.”
For example, if you simply estimate that you gave as much to charity this year as you did last year without really checking and adding up your receipts, that deduction could be removed, at least in part, upon examination.
3. Your records aren’t 100% accurate
Record-keeping also is essential for outside income from part-time jobs or tutoring, Perlman says, and the best thing of all is “contemporaneous” record-keeping. “The IRS loves that word,” she says. “Tax courts love that word.”
“Contemporaneous” means keeping your records as you go along, rather than waiting until the end of the year and trying to reconstruct everything. And, of course, you should keep receipts for everything.
If you have good records and backup documents, an examination can be fairly painless. You just supply the information requested to the IRS, any necessary adjustments are made, and everybody is happy.
There may not even be a penalty. “You usually have to have seriously underpaid to get a penalty,” Perlman says. “Suppose you forget to report that little bit of bank interest income or that dividend income. That can happen to anyone.”
But it may lead to an examination because the IRS has that information on the 1099, which was provided by the bank or broker.
4. You fudge some numbers and hope no one notices
“You are not supposed to play the audit game,” Perlman cautions, meaning you shouldn’t count on the IRS not to audit you because your deductions for charity or unreimbursed employment expenses are reasonable or in line with what most people have.
“Honesty is the best policy” if you don’t want to worry about an IRS audit, Perlman says.
Occasional income from tutoring, for instance, whether paid in cash or check, won’t be spotted by the IRS if you don’t report it. “You’re supposed to report all your income, regardless of how you are paid,” Perlman says.
The more serious form of audit—a face-to-face encounter—is reserved for people with higher incomes. “The higher the income,” Perlman says, “the likelier the audit.”