Filing a tax return often feels like a gigantic relief. Once you’re through scrounging for the proper documents to support your reported income and, perhaps more importantly, deductions, you get a break from thinking about the IRS.
Until you get audited, and then you’re one step back – from where you started!
Unexpected communication from regulators tends to raise questions, right along with your blood pressure…
- what did I do wrong?
- how long will this process take?
- why me?
…all legitimate concerns faced by well-intentioned taxpayers. Many serious penalties don’t factor into a closer examination of accounting until the response leans more toward…I got caught? which typically isn’t the concern.
Am I at risk?
The good news is there’s a very small chance you’ll actually have to worry about this. Audits affected less than 0.5% of individual returns in 2019. Of those, many reached resolution through correspondence rather than stacking documents on the kitchen table for a stranger with a calculator and pocket protector.
The not-so-good news is that no matter how meticulously you follow state and federal guidelines, there’s no proven way to prevent an audit. That wouldn’t align with the agency’s approach to fairness and impartiality in maintaining compliance.
Beware of these red flags
Although you can’t predict your time in the proverbial spotlight, you might want to be aware of some obscurities that could signal a potential problem in the system. Examples include:
- “Too much money.” Living the American dream increases the chances of an investigation into your prosperity. If you earn more than $10 million per year, there’s a much higher chance you’ll be audited than income-earners in lower tax brackets. In terms of the time commitment required, resolution would probably take longer than the less complicated returns involving significantly less money.
- Overzealous generosity. Contributions to nonprofit organizations can decrease your liability, making donations a “win-win.” Philanthropic efforts allegedly far too generous for your reported income level, however, require supportive accounting.
- Business hobbies. Entrepreneurship provides certain deductions not available to W-2 wage earners. A clear division of business versus personal interests (and assets) decreases potential questions about your level of success.
IRS suspicion could depend on any number of variables in your return, but that doesn’t mean you can’t use the law to your advantage.
Just be sure you understand the tax code to which you’ll be held accountable before you file. And if you receive an audit notification, protect your interests with our sophisticated tax and accounting counsel.