The Internal Revenue Service (IRS) recently announced it will not require taxpayers to amend their returns or pay back any extra money they received in their refunds due to incorrect health care-related tax information on Form 1095-A. This is good news for individuals who may have mistakenly filed an inaccurate return.
However, the IRS is not forgiving of all inaccurate returns. In fact, some filing errors could raise a red flag with the IRS and result in your return being selected for an audit.
“There are certain mistakes on your return that will increase your chances of being audited,” said Steven Warren, CPA, Director of Taxation at Lehrman, Flom & Co., PLLP in Minneapolis. “We advise people to maintain and organize all the necessary documents to support all reported income and deductions.”
The Minnesota Society of CPAs (MNCPA) compiled a list of red flags that could trigger an audit if they apply to you.
- Misreporting your income. Always make sure your income on your Form W-2 and Form 1099 matches the reported income on your return.
- Unusually high charitable deductions. You may raise some eyebrows if your charitable donations are well above average for your income range.
- Unusually low salaries. The IRS takes a close look at S corporation compensation practices, particularly if the salary paid to a principal owner looks suspiciously low.
- Your Social Security number is wrong. Make sure you clearly write or carefully type your Social Security number to avoid added scrutiny over your hand-filed return, or the rejection of your e-filed return.
- Claiming losses from “hobby” activities. Certain types of businesses showing losses, such as horse racing or horse breeding, will often generate increased attention.
- Claiming a different amount for your alimony deduction or alimony income than your ex-spouse claimed for the corresponding item. This is easy pickings. You must report the Social Security number of your ex-spouse when you report your alimony deduction.
- A large amount for meals and entertainment expenses. Sizable meals and entertainment expenses for your type of business are common targets.
It is important to note that some returns selected for audit don’t necessarily have errors. Sometimes, the IRS selects returns for audit based on a statistical formula in their random selection and computer screening process. In other cases, you may be audited if your return involves transactions with other taxpayers who are selected for audit. Whatever the scenario, Certified Public Accountants (CPAs) can help taxpayers file their returns accurately and, if needed, guide them through the audit process.