Reasons You Could Be Audited…and How to Avoid Them

The concept of being audited by the IRS scares most people, including me. Even though I follow the rules and pay my taxes on time, there is always that worry that the IRS will come a knocking. The word has gotten itself a frightful connotation, but the audit is really just justifying your deductions to an investigator from the IRS. That still doesn’t mean I want that headache and I assume neither do you. Here are some things to avoid that just scream “AUDIT ME.”

• You Are Already Being Watched If you receive the bulk of your income in cash (e.g. servers, dancers, etc) the IRS already tends to keep an eye on you. It’s important to try to get a 1099 from employers who compensate in cash to have exact documentation of your income, but we all know that this is not always an option. People who are self-employed and own small businesses are also on this radar.
• Errors in Calculation The main reason citizens receive letters from the IRS is due to simple errors in their calculations. Goofs in your addition and subtraction could lead to a full audit. Though math errors alone are rarely cause for a full fledged audit, check yourself before sending in your forms.
• Interest and Dividend Report Discrepancies Basically, this means that all those W2s and other paperwork you have sent the IRS does not match the figures you have put on your tax forms. There are a great deal of reasons for this to occur (1099s being one of the culprits) but you should always make sure that what you have recorded and what your employer(s) has reported match.
• Whistleblowers So, you have fooled the IRS. The worst thing you could do now is tell someone. Most people don’t realize that the IRS offers rewards, as much as 15-20% of the additional tax owed, to everyday citizens who inform on their peers’ tax evasions. If you know of someone who has been ”cheating” on their taxes, you can report it with Form 211: Application For Award For Original Information or call the IRS hotline at (800) 829-0433.
• The “DIF Score” This is an interesting one. The IRS has come up with a computer program that uses a secret IRS equation that will compare your deductions to those of other people in your income bracket. This way they can quickly see the DIF-ference and flag for audit returns that have exceptional deductions for their bracket.

So, do your best to avoid these red flags. You can’t really control if the government decides to audit you, but you can try to give them the least amount of reasons to suspect you. Good luck!

Tags: 1099, audit, audited, cash income, DIF score, Errors in Calculation, Form 211: Application For Award For Original Information, income bracket, Interest and Dividend Report Discrepancies, IRS hotline, red flags, self-employed, small business owner, tax evasions, w2, Whistleblowers