Nobody wants to be audited. It’s troublesome and it can be expensive. But I bet you never think about your chances of passing an audit.
Most of us think that auditing is for the super rich, not for people under 30 who are just trying to get their financial lives right. well it’s notfully true.
The chances of passing the audit are about 0.6%. So pretty low. However, what not means you have to let your guard down.
What is an audit?
A tax audit is a review of your tax return by the Internal Revenue Service (IRS). During this process The IRS reviews your return and all of your financial information line by line to make sure everything is correct..
If they find any errors, they may ask you to pay taxes or fines. In extreme cases, you can be held criminally liable.
Tip MU30: you will always be notified by mail if you pass the audit. The IRS will never call you on the phone. If you receive any suspicious calls, it could be a scam.
What are your chances of passing the test?
The words “IRS tax audit” may conjure up nightmares of agents banging on your door, but that’s rarely the case.
I spoke with Michael Ecksteinregistered agent (EA) with Eckstein Tax Services, about the chances of being audited, and he told me this:
“The chance of an accidental full-scale inspection is relatively minimal. Most checks are triggered by missing information (like a forgotten W2), incomplete forms, your numbers being completely out of order, and sometimes good old random luck. The best way to prevent these triggered audits is to make sure you don’t cut corners. Report everything.”
In general, there are fewer checks
According to recent reports, the chances of passing an audit are declining across the board. In 2020, only 1 out of every 166 declarations was audited, a significant decrease from previous years..
There are several reasons why audits don’t work. One of the main reasons is the current economy. With so many people out of work, the IRS budget has shrunk and there is less money available for audits.
In addition, the agency is struggling with a shortage of labor – they simply do not have enough auditors to check all tax returns. Thus, they resorted to testing those who are most likely to owe the government large sums of money.
This brings me to my next point…
How does your income affect your chances of being audited?
Generally, the more you earn, the more likely you are to face an audit.
But there’s an interesting twist: You’re also more likely to pass an audit if you make less than $25,000 a year and qualify for an earned income tax credit. The reason is that the IRS wants to make sure no one is claiming it illegally.
This table presents the most recent audit figures taken from v IRS data book.
| Total income | IRS audit level |
|---|---|
| $0 | 8.9% |
| $1 to $25,000 | 0.7% |
| from 25,001 to 50,000 USD | 0.4% |
| $50,001 to $75,000 | 0.4% |
| from 75,001 to 100,000 USD | 0.4% |
| from 100,001 to 200,000 US dollars | 0.4% |
| from 200,001 to 500,000 USD | 0.6% |
| from 500,001 to 1,000,000 US dollars | 1.1% |
| From 1,000,001 to 5,000,000 US dollars | 2.5% |
| from 5,000,001 to 10,000,000 US dollars | 5.1% |
| $10,000,001+ | 8.6% |
5 red flags that lead to an audit
There are all sorts of red flags that can lead to an audit — claiming intraday trading losses on your Schedule C, receiving an early payout from a 401(k) or IRA, and not reporting a foreign bank account.
However, the five biggest red flags that could lead to an audit are:
1. Not reporting all of your income
The IRS has copies of all W2s and 1099s you receive. If you’re filing a tax return and the totals don’t match what’s already in the system, that’s a red flag.
So, heed the warning and report every penny of income you make – whether it’s a full-time job, part-time job, Uberdog walking, Etsy shop, TikTok, freelancing or something in between.
Read more: Taxes for Freelancers: 7 Steps to the Right Decision
2. High income
Your audit risk increases substantially if you have a high income. For example, those who earn at least $1 million a year have a 2.5% chance of being audited, while those who earn $200,000 a year have a 0.4% chance.
This does not mean that you should not strive to make a lot of money. Hell, I hope we all become millionaires. But just know that the more you earn, the more records you may need to prove it.
3. Extremely large deductions, loans or losses
The IRS knows, on average, how big someone’s deductions, loans, or losses are based on their income. If you go outside of the range they marked as “normal” for any of these things, your return could be flagged for auditing.
However, don’t be afraid to demand something if you have complete records to support it.
Read more: How long do you have to keep tax returns?
4. Application for the US Opportunity Tax Credit
The American Opportunity Tax Credit is a huge deal if you are a college student. You can get up to $2,500 for each of your first four years of college!
Because of this, the IRS may want to look at your tax return again if they decide that you require it when you are technically not eligible.
Read more: Need tax breaks? Here is the list
5. You traded cryptocurrencies
As the cryptocurrency gains popularity, so does its control by the IRS. As such, they crack down on checks on anyone who actively sells, receives, or trades in virtual currencies, including bitcoin.
So, make sure you list everything correctly on your tax return if you own cryptocurrencies.
Read more: Crypto Crackdown: Why the IRS is not messing around this year
How to reduce your chances of getting tested
There are a few things you can do to reduce your chances of getting tested.
Double check your tax return
First, make sure all information on your tax return is correct. If there are any errors, it could trigger an IRS check or at the very least delay your receipt of your refund.
Claim only the deductions you are entitled to
Also, be careful about claiming deductions or loans that you are not eligible for. The IRS fights tax fraud, and they are more likely to review taxpayers who claim deductions that appear unusually high or out of character, such as claiming 100% commercial use of your car or writing off a charitable donation that represents the bulk of your income.
You can learn more about popular deductions from our article: 10 Deductions You Didn’t Know You Can Make as a Business Owner.
Be honest always
Finally, just be honest. It’s okay if your income is unusually high, you’ve traded cryptocurrencies, or you’re claiming significant deductions or losses on your return. If everything is correct, you deserve to report everything you can. Provide full details and be prepared to provide evidence if the IRS knocks.
What to do if you are checked by the tax office
After all, you can do everything right and still pass the audit. If this happens, take a deep breath and don’t panic.
- Collect all necessary documentation state your case. Receipts, W2, 1099, proof of investment, etc., etc. Everything related to taxes in your financial life, you will need.
- Respond to all IRS inquiriesas soon as you can. Seriously, don’t ignore them, it won’t end well.
- Get legal advice from a tax professional – especially if you do not agree with the results of the check.
Summary
bottom line? The chances of being audited may be low, but that doesn’t mean you can risk your taxes. Be sure to complete them correctly and on time, and be prepared to answer any IRS questions.
And if you’re worried about making a tax mistake, use tax preparation software such as TurboTax or professional tax inspector can be a great way to find peace of mind.
Popular images: Andrey_Popov/Shutterstock.com