By Alden Wicker of LearnVest
Read more about taxes on LearnVest.com
Tax time is annoying enough without the IRS knocking on your door or sending you a stern letter saying they think you’re trying to pull a fast one.
But the IRS has audits for a reason—so that everyone pays their fair share.
In order to quickly process millions of tax returns, the IRS has certain things that will automatically trigger an audit. That doesn’t necessarily mean you’ve done something wrong, just that the return you filed has something that might signify you’re trying to defraud the IRS. But if you did everything correctly on your return, you should be able to prove that you are paying all of your taxes. The IRS will then agree with you and leave your return the same, and the audit will be over without any fines or (God forbid) jail time. Phew!
The audit can be conducted either by mail or in person, and there are three possible outcomes:
- The IRS decides all is well and the return stays the same.
- The IRS proposes a change and you agree to it and/or pay more taxes, interest or a penalty (and in rare, severe cases, forfeiture of property and jail time).
- The IRS proposes a change, and while you understand it, you don’t agree. In the latter case, you can appeal or enter into a mediation with the IRS.
We’ve listed the top audit triggers for you, how to know if you’re in the wrong and what proof you’ll need to ward off a full-blown audit, fines and frustration:
1. Reporting the Wrong Taxable Income
You can’t lie about your taxable income, because both you and the IRS received your W-9 and 1099 forms, for both full-time and freelancer employees.
Perfectly OK: Making a small math error. The IRS will correct that.
Not OK: Estimating or fudging how much you’ve made, even if you’re a freelancer.
The Proof You Need: Compare the 1099 you receive from the company against your own records. If you think it is wrong, inform the company and ask that they file a correct 1099 with the IRS.
2. The Home Buyer Credit
If you bought a home for the first time after April 8, 2008 and before January 1, 2010, then you could have gotten the first-time home buyer credit. This credit is like an interest-free loan of up to $8,000 from the government. People who claimed the credit in 2008 pay back the loan over 15 years by paying an additional tax, but those who claimed it in 2009 and 2010 (and 2011 for service members) do not have to pay it back.
However, this credit has been used and abused by those trying to defraud the IRS, so they will scrutinize anyone who claims this credit to exclude people who are flipping homes or speculating in real estate. For that reason, they will be checking to see if you stayed in the home for more than 36 months (three years), as required.
Perfectly OK: You bought your first home, and you’ll be living in it for a while.
Not OK: You bought your first home … and then promptly resold it within three years for a profit, or made another home your primary residence. You’ll need to pay back the credit in full when you pay your taxes that year.
The Proof You Need: Keep all records pertaining to the purchase of your home.