No likes the idea of going through a tax audit. Indeed, many of us get downright nervous about being audited. There is no way to completely avoid an audit; some IRS audits are performed randomly. You never when your number will come up. Most audits, though, are performed because of some red flag the IRS sees when looking at your tax return.

If you want to reduce the chances that you will be audited for something that is in your tax return, you will need to be careful about you fill out the forms. For the most part, avoiding IRS red flags is fairly simple: Only take the deductions and credits you are actually entitled to, and double check your return for mistakes.

(Click to continue reading…)

If you’re a personal finance stats junkie like me, you’d love the IRS Data Book. It is chock full of fun and interesting statistics that give you a glimpse of one of the more private havens in one’s life – their tax return. While you can’t sneak a peek at your neighbor’s return, you can guess some interesting facts about American society through our tax returns.

I take a romp through the IRS Data Book and pull out a few fun statistics that I found interesting, or surprising, and I hope you enjoy them too. All of the data is taken from the Excel spreadsheets for Fiscal Year 2010 but they also issue a PDF that summarizes some of the higher level statistics.

(Click to continue reading…)

Doing your taxes is never fun. Even if you ignore how you must spend a couple hours filling out boring forms, finding documents, researching deductions, blah blah, there’s always the fear that you’ll be audited. I remember having the most vanilla tax returns back when I was a teenager, the 1040-EZ, and even then I was irrationally concerned about an audit.

The reality is that very few people get audited, just a percent or so each year (in 2010, 1.1% of returns were examined), and some of them deserve it. As much as we may like to think of the IRS as some cruel, emotionless monster trying to make the lives of hardworking Americans as miserable as possible, it’s not. They’re trying to collect tax revenue so the government can continue to provide the services hardworking Americans need.

How do they decide who to audit? It’s actually very straightforward.

(Click to continue reading…)

Robert Frank at the WSJ looked at the latest audit statistics in the IRS Data Book and discovered that the IRS audited more than 18% of returns with income of at least $10 million. This is an increase of 80% from 2009, when only 10% were audited. Audit rates increased for other income groups as well, though most sharply for the higher brackets.

If you look at the statistics, it’s actually quite fascinating. Every income range in the Data Book showed an increase in audits, though the $10mm or more crowd saw the greatest jump. Here are the increases:
(Click to continue reading…)

Last month I had the pleasure of talking to Rich Preece, Director of Product Management for TurboTax, about the improvements they’ve made to this year’s version of the tax preparation software. One area that they’ve improved is in their Audit Risk Results section, which identifies parts of your return that might trigger an audit. They reviewed the audited returns and collected the top twenty five to thirty reasons they believed triggered an audit. Then they look at your return, see if there are similarities, and bring them to your attention. It’s a feature from year’s past but it was the first time I really paid much attention to it. The purpose of the Audit Risk section isn’t to dissuade you from taking deductions that are rightfully yours, it’s designed to remind you to take a microscope to that section to make sure you did everything correctly.

For example, a common audit trigger is the child and dependent care credit. To claim the credit, you need to provide the social security number of the child or dependent. It’s not uncommon for a divorced couple to both claim a child if they are filing separately. What ends up happening is that when the first tax return is processed, the social security number is claimed. When the second tax return is processed, an audit flag is triggered because the child’s social security number was claimed in another tax return. So the purpose of these features, and of the following list of tax audit red flags, is to identify areas you need to take a closer look. Don’t let the fear of an audit stop you from claiming what is rightfully yours, but be careful.

(Click to continue reading…)

Now that we know how the IRS picks who to audit, we need to know what we can do to prepare for it. Even if you’re sure you got your return right, that you didn’t participate in an abusive tax avoidance scheme, or can’t possible be snared by the computers, there’s still that “randomly selected” bit.

So, like zombie attacks, the key to surviving a tax audit is to be prepared.

(Click to continue reading…)