Not all reasons that people are audited are “mistakes.” To some extent audits are just the luck of the draw-a certain number of returns are picked at random for audits. Insofar as audits are non-random, some of the factors that make an audit disproportionately likely-e.g., having a high income, being self-employed, claiming an unusually high amount in charitable deductions, working in a primarily cash business, etc.-wouldn’t count as “mistakes” either.
There are some things like that you could have on your return that might or might not be erroneous. Consider the aforementioned example of claiming an unusually high amount in charitable deductions. If you just happened to give an unusually generous amount to charity last year, then there’s no problem. Yes, you’re a little more likely to be audited, but your charitable deductions will be found to be legitimate, so you’ll be fine. Same with other factors that make an audit more likely, like income that varies greatly from year to year, claiming a lot of deductions as a self-employed person for a home business, etc. If it happens that your income really is erratic like that, or if you really did undergo unusually high legitimate expenditures for your business, then the audit isn’t going to hurt you.
It’s only if you’ve been fudging in these areas that their being red flags for audits can put you in a pickle. So don’t worry about red flags if they’re a byproduct of filing your taxes correctly; worry about them only if they result from your providing inaccurate information.
But a lot of the things that make an audit more likely really are straightforward mistakes. The Internal Revenue Service (IRS) infers that if your return is sloppy and rife with errors, that there’s a good chance you overpaid or underpaid your taxes. Remember the adage “Garbage in; garbage out.” If the IRS sees that some of your data is “garbage,” they have less reason to trust the figures you derive from that data that tell how much tax you owe.
Specifically, here are a few common errors that can make the IRS want to take a closer look at your return:
* General sloppiness. Many erasures and cross outs. Names, addresses, social security numbers, signatures, or other items are incorrect or illegible or left blank. Calculation errors.
* Required schedules, W-2s, etc. are not included with the return.
* All the figures are in round numbers.
If your return is all in round numbers, the IRS assumes you’re giving it rough estimates. It doesn’t want rough estimates; it wants exact figures.
* Confusing tax deductions with tax credits with tax rebates.
Let’s say you calculate your income as $20,000 and your tax as $400. Then you realize you have a $500 deduction, credit, or rebate that you haven’t yet factored in. What is the difference among these three?
If it’s a tax deduction, you subtract it from the $20,000. You change your income to $19,500, and use that figure to determine the tax you owe.
If it’s a tax credit, you subtract it from the $400, but not past zero. So in this case it means your taxes for the year should have been zero, since the $500 credit is greater than or equal to the $400 you would otherwise have had to pay in taxes.
If it’s a tax rebate, you subtract it from the $400, and if that takes it past zero, you should receive money rather than pay taxes. In this case, you’d be entitled to $100, since that’s how much your $500 rebate exceeds what you would otherwise have had to pay in taxes.
(Caution: Just to make things more confusing, some things that are called “credits” are credits in this sense and some are rebates in this sense. So make sure you understand which it functions as. Don’t just go by its name. The “first time home buyer’s tax credit,” for instance, functions as a rebate if it exceeds the amount of taxes you would otherwise have had to pay.)
* Problems on previous returns.
This is where errors can have longer term consequences. If you make a mistake one year and the IRS catches it, they’re more likely to audit you in subsequent years.
* Didn’t file a return at all.
This is a pretty big “mistake.” If it somehow slipped your mind to file, the IRS knows that tends to happen a lot more often when a person would have owed rather than when he or she would have had a refund coming.
In summary, take your time, double check your work, and try to submit as error-free a return as you can, and you’ll decrease your chances of being audited. Not to mention that if you are audited, the more meticulous you were about doing everything correctly, the less chance there is that the audit will find anything to hurt you.