Avoid These Tax Return Errors That Trigger An IRS Audit
A few days ago I wrote about a few situations that can increase the chance of an IRS audit.
Here are a few specific tax return errors that can trigger an IRS audit and how you can avoid them.
- Incorrect Data: The most common reason for the IRS flagging individual returns is incorrect reporting of Social Security Numbers for filers and dependants. Incorrect tax return reporting of income and taxes paid from forms W-2 and 1099 also are a sure fire way to set off IRS computers. This one is easy to avoid: double check your return and make sure the information you have entered is correct.
- Filing Late: Not filing returns on time or not filing a return for even one year will catch up to you. Instead of not filing a return, file a Form 4868, Application for Automatic Extension for Time to File U.S. Individual Income Tax Return. This must be filed no later than April 18th. While this gives you an automatic 6-month extension, until October 18th to file your return, it does not give you an extension to pay any taxes due. Filing an extension does not make your return more likely to be selected for audit.
- Paying too Little: If you do not have the money to pay the taxes due, don't just send in a lesser amount without an explanation. This will trigger an IRS notice and it could also result in the IRS requesting a more invasive review of your return. Instead, file Form 9465 Installment Agreement Request with your return. You'll still have to pay interest and possibly a late payment penalty for any taxes not paid by April 18th. However, the IRS will work out a payment plan for up to 60 months at a lower interest rate for the balance that you owe.
- Math Errors: These are also high on the list of audit triggers. Using a tax professional or a computer program to prepare your return should help you avoid this problem.
- Special Situations: Also, certain situations, such as not reporting some gains on the sale of a home when business-use-of-home deductions were claimed on past returns will trigger an IRS flag. Also, reporting large amounts of self-employment income, typically in excess of $100,000, on Schedule C seems to get the IRS' attention. According to the IRS, often these filers load up on dubious deductions and have fewer records justifying the write-offs they claim. If your tax return includes a special siituation, the best thing to do is to seek the review and advice of a tax professional.
Check back next week when I'll write about tax refunds and what to do if you are getting one.
Ray Martin
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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