People have funny misconceptions about an IRS tax audit. Some even think they have the ability to avoid an audit or lessen their chances by doing such things as filing for an extension, filing separately from a spouse, or dealing with cash-only transactions. The truth is anyone can be audited by the IRS, at any time and for no special reason.
So, why would they single YOU out of the millions who file every year? You could be part of a targeted group, or by random computer generated number, or because of certain red flags that draw the IRS’s prying eyes to your finances. Knowing these red flags could decrease your chances of an audit. Maybe.
One red flag that will increase the likeliness of Uncle Sam to take a closer look at you is errors on your return. If you file taxes without the help of a professional and make math mistakes or if the amounts you report do not coincide with your supporting paperwork, the IRS may pick on you. Even if the error lies in the hands of the IRS agent – for example if they can’t read your writing; or key in your social security number or math equations incorrectly – it may raise their eyebrows enough to nab you for an audit.
Small business owners are commonly on the radar because of their ability to pull the wool over the IRS with cash transactions. People in service industries, such as wait staff or tip-earners may also be on the list, especially if they have unusually low incomes to report compared to the amount of money they have on hand to pay bills. If you are reporting wages that are dramatically lower than what you are claiming, then beware. You could be sending the IRS a red flag. Self-employed people or people who have home-based businesses are also common targets.
Never brag about your income or about your ability to pull the wool over Uncle Sam’s eyes. Hire a professional and licensed tax preparer to help you with your taxes. Although that alone may not help you to avoid an IRS audit, the tax professional will be under the same scrutiny for miscalculating your documents and should be able to help you in the event that an audit occurs. Keep your paperwork for at least three years, because it may need to come to the surface in the case of an audit and the last thing you want to be doing is scrambling to find, or remember what you did in past years.
Whatever you do, don’t panic if the IRS comes knocking on your door. Being cooperative and helpful can make an audit by the IRS a lot less painful and may help you to avoid any penalties for false claims or misrepresentation.