Avoid The Dread Eye Of The IRS Auditor

After The Reaper, second in the line of “those to fear” is the IRS tax auditor. What with his scales and poison fangs and all. But you can dodge his fell gaze if you know the red flags he’s looking for.

Basically the trickier your return and the income you have from sources that are non-withholding and non-reporting, the more likely are to trigger an audit.

Don’t puff up deductions, especially on charity donations, travel, entertainment, meals and car expenses, as these will set off the klaxons.

Claiming too much in deductions can hurt, but also too will not taking the common deductions.

Also earning over $200,000, filing a loss on a Schedule C, rounding your numbers, and hiring family members can set him off. Donating a lot relative to your income or making a large transfer from your business account to your personal account. Oh, and getting paid in all cash. Yep, they like to scrutinize that.

If you do happen to get hit with an audit, here’s how you can deal with it.

Are you afraid of a tax audit? [Prism Money]

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Comments

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  1. Tim says:

    Does cowbell help?

    • Cheap Sniveler: Sponsored by JustAnswer.comâ„¢ says:

      More cowbell!

      And why isn’t this a “Tax Cat” post? This IS a cat blog, right?

  2. Cheap Sniveler: Sponsored by JustAnswer.comâ„¢ says:

    “…earning over $200,000, filing a loss on a Schedule C, rounding your numbers, and hiring family members can set him off. Donating a lot relative to your income or making a large transfer from your business account to your personal account. Oh, and getting paid in all cash. “

    Guess I have nothing to worry about. Except for those random useless audits they do, just to throw a little fear into the hearts of poor but honest taxpayers.

  3. Theodore says:

    Rounding numbers? Tax software does that for you.

  4. Hi_Hello says:

    i never understand why everyone has to file tax. It’s annoying. I can never understand why the state always even out while the fed always have to give the money back. Why can’t fed balance out like the state?

    • Bongo25 says:

      Because taxes are needed to maintain modern society? It’s pretty easy to understand.

      • Hi_Hello says:

        That I understand, but I get fed tax taken from my paycheck. state tax taken from my paycheck. social securtiy tax from my pay check

        so why each year, I have to keep filing?
        and why the state does it right and not the federal?

    • dangerp says:

      Because you aren’t choosing your withholdings correctly on your w4. IMHO, the worksheet on the back seems to give a lot of wiggle room, and always seems to result in withholding more taxes than necessary.

      Find a calculator online that will tell you, preferably based on last year’s taxes, how much you should withhold to minimize your refund/taxes owed. Then update your W4 with your employer. I did this and it resulted in me getting an extra $100 or so in my paycheck every month, while getting a tax return at the end of the year that was almost nothing.

      Of course, do at your own risk/research. I am not an advisor or tax expert. I would just rather have my money sooner.

    • sirwired says:

      While it’s true that essentially everyone with a job has to file, if you don’t owe money, the penalties for not filing are zero, since they are all based on what you owe.

      • Hi_Hello says:

        REALLY?? so if I dont file, it’s all good? it would be soo much easier if those who want to file, deduct stuff and crap, file. doesn’t who don’t but owe, just get a bill. And if they think the bill is wrong, fill out some forms.

        Just like property tax. They send a bill, I pay. it’s all good. I don’t need to fill out a form each year and tell them that I replaced my bathroom faucet so my property value might need to be adjusted and some crap like that.

        • sirwired says:

          I just said it was possible to do this, not that it was a good idea.

          If you owe and fail to file, the IRS may make an attempt at computing your taxes in the manner least advantageous to you (as in, no deductions of any kind except the exemption you get for breathing and not being a dependent.) If they decide yo might owe, you then receive a bill for hefty penalties and interest on top of your late taxes. You can then file the correct amounts, but if the correct amounts mean you still owe, you will have to pay interest and penalties on that amount. If you don’t actually owe, you’ll have to file to prove it to them, meaning you haven’t actually accomplished anything other than putting off filing.

          The reason they don’t just bill you to begin with is because computing the correct tax involves you giving the IRS information they don’t have, and aren’t supplied by anyone but you (i.e. dependent information, local taxes, etc.) If they tried to compute your bill automatically, they would inevitably get it wrong.

          Given that the hassle you may have to go through when the IRS computes your taxes for you, it’s better just to go ahead and file (on time), no matter what. Best case, you get “free” money (the IRS NEVER mails a refund without a return), worst case, you pay tax you’d have to pay anyway.

    • c_c says:

      Adjust your withholdings. Aside from deductions & credits, if your withholdings are correct you should have the correct amount taken out each paycheck to amount to what you owe in total. When I got married I forgot to change my W4 and was having way too much taken out, I had a big refund that year … so I adjusted my witholdings and the next year things were more in line.

  5. Blueskylaw says:

    I wish my tax return was as large as General Electrics, with a weight of more than 500 pounds.
    I can see the IRS agents saying to themselves; Gee, it’s Friday afternoon, why don’t we just let this one slide through and start with the little guys on Monday.

  6. TheGreySpectre says:

    The one time I got audited I got a letter saying “you did things wrong and forgot to take these deductions so here is $1800 you can have back” so audits aren’t necessarily always a bad thing.

    • Luckier says:

      We got similar messages from the IRS for the last two returns (though smaller $ amounts) so I think it’s time to get a new accountant.

  7. Beeker26 says:

    Wesley Snipes says hello.

  8. sirwired says:

    File using tax software, and you don’t have to worry. All of the major packages include audit protection gratis.

  9. zegota says:

    The one thing I’m worried about this year is that I’m deducting my (significant) moving expenses. I have documentation and all that, so I wouldn’t be worried if I were audited, it’s just a hassle. Should I include the bill in my e-file (can you even do that?)

  10. BurtReynolds says:

    Speaking of tax time. How does everyone handle the old question of “use tax”, or the sales tax you are supposed to pay on the 2 TVs you bought from Amazon. Do people actually pay it? Put zero? Or throw the state a few bucks and hope they don’t look around?

    • ben says:

      I don’t know what you’re talking about, Mr. IRS Man. I’ve never ordered anything off the internet. I’ve never even heard of the internet.

    • steveliv says:

      Huh..What… :P

    • c_c says:

      My state has a table to estimate your use tax based on your income if you don’t have receipts … I just use that.

    • chucklebuck says:

      I actually pay it – I’m too paranoid of getting called on it not to pay it. But everything I order online comes from Amazon and they make it easy to get a list of all your orders for a year to add it all up.

      I fear getting audited because my wife is self-employed but her business (singer) brings in way less money than the expenses (lessons and the associated parking expenses, concert dress, sheet music, etc) that we are allowed to deduct. Her Schedule C might as well have “AUDIT ME” written across it in bright red ink. We’re mostly OK about keeping records, but to tell the truth, we rely a lot more on online receipts and credit card statements for our proof than we probably should.

      • Bsamm09 says:

        Does your wife meet the criteria for her singing to not fall in the Hobby Loss category?

        • chucklebuck says:

          Yeah, she is definitely doing this as her primary (only, actually) money-making activity and she does get paid, but the expenses outweigh the income. We haven’t hit the 5 year mark yet, so we may yet run afoul of the Hobby Loss rules, but we haven’t yet and our argument is pretty solid.

  11. shthar says:

    My buddy works at the IRS, he sez they are so under staffed now theonly returns that get audited, or even looked at are the ones the computer spits out at em.

  12. framitz says:

    I was audited a few years ago for reasons unknown to me.

    I got so confused, I finally wrote a letter to IRS and asked them to work it out and send me a bill for what I owed.

    A few weeks later I received a check for around $2100. My error was in IRS favor so they refunded overpayment with interest… what a RELIEF that was.

  13. Donathius says:

    Hah! I have no investments and I own no property! I also don’t make much. If the audit monster comes after me I’ll be glad to show them my W-2, my wife’s W-2, the tax form from my student loan company, and the baby. There is nothing else on my 1040.

    On a related note can I say that I love the Earned Income Credit? I paid $1000 into federal taxes last year and we’re getting almost $2000 back.

  14. Mold says:

    IRS looks for the obvious and common scams. Duh.
    Never ceases to amaze me how many dolts attempt the same stoopid crap…even after their equally ungifted friends tried it and failed.

    • PSUSkier says:

      It’s a lot like the people who bet on red because black came up the last 5 times in roulette. “Oh hey! They caught my friend and I’ve never heard of anyone else getting nailed, so statistically I’m golden!”

  15. tgrwillki says:

    I was audited year before last for vehicle mileage.

    At the time, I was living with my girlfriend, and working as an account executive. While my girlfriend worked less than a block from where I did, I kept my car that I was using for work at the office, and just rode to and from work with her every day, figuring it would be easier to track my mileage. Unfortunately, I didn’t realize that under this circumstance, the IRS won’t allow you to claim mileage for your first trip of the say, since they consider it a commute. It ended up reaming me for about $2000 as a result.

  16. FrankReality says:

    You definitely don’t want to cheat.

    In the decades I’ve been doing my taxes, I’ve managed to make some signficant errors on several returns unintentionally and the IRS caught them every time. In some cases the errors caused me to owe more tax and a penalty and in others I’ve overpaid a bunch. Let me also say that the IRS and the states do indeed talk to each other so if you get caught with an error on the Federal, odds are that your state revenuers will be contacting you too.

    I quit having an accountant do mine because they too made some rather serious errors.

    Up until five years ago, I did mine by hand – paper, pencil and calculator. Now I use tax prep software, but somehow I’m still able to find ways to mess up. The last one was because my wife paid into a Roth rather than a traditional IRA and I had thought otherwise. Oops!

    My rule of thumb is if I can’t prove a deduction or credit and be able to defend it in an audit, I don’t claim it even if it is legitimate. One year we cleaned out several pickup loads of furniture and clothes, then took them to charities – besides a complete inventory of the items, we also took digital pictures. The tax prep software calculated estimated value, but we thought it was too high and cut it in half.

    By the way, those letters you get saying you owe more tax aren’t a full audit – those are just computer cross-checking the data reported to them versus what you claimed. Since those are done by computer, I suspect most if not all returns are checked in that way.

  17. Jevia says:

    A friend of mine that worked for the IRS said that EIC and home-office deductions were always big red flags.

  18. YokoOhNo says:

    There are only 7,000 pages in the tax law…if you can’t determine your liability with that kind of guidance then you must be a thief!

    the alternative is to own a large corporation that has liars, i mean lawyers, on salary and have them exploit every loophole…then when a POS IRS agent comes to audit you, have your liar, sorry lawyer, threaten to destroy the agent’s life and also threaten to make this go as long as needed to keep the deductions. this is common practice among the fascist class and their ally, the political class.

  19. Cetan says:

    I’m gonna miss the simple single military online files when life gets more complicated…

    Push buttons, receive moneys.

  20. Happy Tinfoil Cat says:

    The tax code is far larger than an encyclopedia set and is 99% loopholes for special interests. Flat tax. No loopholes. No IRS auditors. No large corps making tax a multi-billion dollar profit center (Enron, BoA, etc.). I told my CPA that I wanted ‘The Enron’ deal, you know, gobs of money. He wouldn’t do it.

    My sister in law got a refund check for $5000 when it should have been $50.00 and never cashed it. She repeatedly called the IRS and explained the problem and they always advised to ‘just cash it’. She instead, wrote VOID across it and mailed it back registered mail. IRS doesn’t have to sign for mail. The IRS heaped fines on her. For a month, the IRS never would return calls meanwhile they charged her $30,000 in fines, garnished her wages at 100% for 3 years, etc. She was finally able to get Sen. Pinetta, head of the Ways and Means committee to talk to the IRS. She got her first phone call back from the IRS, they screamed at her for ‘making such a big deal out of it’

    Few years ago the IRS had a program to terrorize random people in order to scare the population into voluntary compliance. As a result, one very honest guy I know closed his business and has spent the entire rest of his life dedicated to do every legal thing in his power to destroy the IRS. He has never paid taxes since.

    It’s time to abolish the IRS. Think of how much money we’d save moving to a VAT and flat tax method.