Getting Ready to File your Taxes? Avoid These Audit Triggers.
Tax season is upon us. The Internal Revenue Service (IRS) began accepting tax returns on Monday, January 27. Those putting the finishing touches on their returns may wonder what the IRS looks for when reviewing returns — what exactly triggers an audit?
1) A large income. Unfortunately, the IRS is more likely to conduct an audit on taxpayers who report a larger than average income. The audit risk more than doubles for those who report over $5 million in income compared to those who report less than $1 million. However, it is also important to note that the reverse is true. Taxpayers who do not report any income are also at an increased risk of an audit. A failure to report doubles your risk compared to those who report $50,000 or less.
2)Questionable credits. One credit that has a history of abuse and results in increased federal scrutiny is the earned income tax credit. Why? It’s because this credit can result in a refund. It doesn’t just reduce the taxpayer’s obligations, it can increase the refund. It is available to qualifying working class families with children. Those who claim this credit should have paperwork to support the claim.
3)Excessive charitable donations. Charitable donations have often led to a closer review of tax returns. This may be even more true with recent tax reform. The tax reform resulted in larger standardized deductions. In an effort to increase the savings that come with itemized deductions, some taxpayers may increase charitable donations one year and skip the next, essentially stacking their donations into a one-time gift instead of spreading it out over a couple of years.
Although some of audit triggers are not avoidable, others are. Whatever the trigger that leads to an audit, any taxpayer that is concerned that a review could result in serious financial penalties or potential criminal charges is wise to seek legal counsel. Some issues that could warrant such concerns can include the potential for the IRS to make accusations of understated or missing income, a large amount of deductions without supporting documents to back the claims, or a failure to account for foreign assets.