Around February, my commute home starts to give me a knot in my stomach. That’s because my bus passes a tax-preparation shop where, as tax season draws nearer, a woman stands outside wearing a Lady Liberty costume and holding a sign that promotes the shop’s services. Oh, great, I think, it’s time to dance with the IRS again.
I don’t know why, but the idea of doing taxes terrifies me. All those forms requiring detailed numbers and asking questions I don’t quite understand—there’s so much room for error! The consequences of messing up are even more intimidating. I’ve never been audited by the IRS (knock on wood), but I can imagine it’s a nerve-wracking process. However, even crossing all my Ts and double-checking my math doesn’t guarantee an audit-free year. As a tax novice, I decided to read up on the matter, and now that I’ve done some homework, it’s clear that a few factors make the IRS more likely to pay extra attention to your tax papers.
1. Making Too Many Errors
According to Jeff Schnepper, a writer for MSN Money, one of the most common reasons tax forms get scrutinized is that they’re riddled with math errors, incorrect spelling, typos, and so forth. The first line of defense against an audit is not giving the IRS a reason to look twice. Remember that the IRS receives financial records from your bank and anyone you’ve earned a paycheck from, so make sure that you’re providing that same information—numbers that don’t match up are suspicious.
2. Being Self-Employed
Sorry, owners of small businesses and freelancers—the IRS tends to look closely at your information. First, it needs proof that you’re running a for-profit operation, not a hobby. Second, it wants to make sure that you’re reporting income accurately and that the small-business deductions you take are accurate and fair (i.e., not claiming personal expenses as business write-offs). Also, if your company’s taken a significant financial hit, that sets off a mini-alarm for the IRS, since it’s possible that you’ve been misrepresenting figures. Sandra Block, a writer for USA Today who covered this topic in 2000, recommends providing an explanation, along with tax papers, to avoid raising any red flags.
3. Not Fitting the Mold
The IRS uses a computer program called the Unreported Income Discrimination Function System to compare each person’s tax deductions and credits against what the IRS has determined is average for certain income brackets. If your DIF score is considerably different from that of others in your category—as in, you earn $60,000 a year but reported a $40,000 charitable deduction—that’s a big IRS red flag, as CNNMoney.com staff writer Christian Zappone described in 2007. The program’s main purpose is to scout out individuals who’re most likely to owe more money after further analysis.
4. Earning Six Figures or More
Back in the day, a common complaint come tax season was that the rich were somewhat protected from audits. But these days, the IRS is more concerned with lowering the country’s astounding tax gap (the difference between taxes owed and taxes paid). “If you’re a millionaire, you’re a lot more likely to hear from the IRS than taxpayers in any other income bracket,” IRS spokesman Terry Lemons told the Wall Street Journal in 2009.
5. Claiming Home Office and Job Expense Deductions
The problem with both of these deductions is that too many people claim them for inappropriate reasons. A home office isn’t just a room that you happen to work in once in a while. And when it comes to job expenses, there’d better be a good reason why your bosses didn’t reimburse you in the first place, so it’s an iffy deduction right off the bat. There are detailed rules for deductions, so unless you want a tax tangle in the future, don’t claim anything unless you know it’s right.
