We understand that the thought of missing to file your federal income tax returns on the tax day sends jitters down your spine. But, there is something more dreadful than missing the tax day, and it is the possibility of an audit by the IRS.
The risk of an IRS audit increases if you are making a lot of money. As per stats, if you earn anything between $1 million to $5 million, the chances of an audit increases to 2.21%. And if you earn $10 million or above, the risk of an IRS audit rises to 6.66%. Though only 0.45% of the U.S. taxpayers were audited in 2019, that doesn’t mean the IRS is not on the lookout for tax frauds.
The IRS started accepting returns from January 27, 2020, onwards, and will handle an estimated 150 million returns this year. But, thinking you are safe because you do not earn the amount quoted might not be pragmatic. It’s not just high income that attracts an audit by the IRS, but many other factors might lead to a tax audit.
In this blog, we are going to throw light on such factors that might attract the IRS’s attention towards your returns and may result in an IRS tax audit. Let us have a look.
The first and most common reason which may attract an IRS audit is unreported income. If the IRS finds any discrepancy in the income reported on your income tax returns and the agency’s data, then it will surely spark the IRS’s attention.
A point to keep in mind is that the IRS has information about all the forms reflecting your income. Be it the Form W-2 from work, Form 1099-MISC or 1099-K used to report side income, or Form 1099-T reporting a taxable interest of $10 or above on a bank account. The IRS has its eye on all such data.
Therefore, if you miss reporting even a single one of these, the discrepancy will be easily traced and will lead to the generation of an automatic letter notifying the same. So, also, if you don’t receive an income form, you are supposed to inform the IRS about the same.
Also, even the income earned by you in the gig economy is taxable. Let us take, for example, you earned $500 from a gig after deducting all the expenses, then you will be required to pay self-employment taxes on the same.
The cryptocurrency owners out there also shall make it a point to report all the gains and losses on bitcoin, etc. to the IRS.
We suggest you keep a record of all such earnings and give a thorough view of your tax return before filing the same with the IRS.
Earned Income Tax Credit
The earned income tax credits are available to all those taxpayers who have children and find eligibility in income limits and other requirements. Many taxpayers without kids also find themselves eligible to receive this tax credit. The tax credit is good news because it’s refundable even if your tax bill is zero and is a sign of relief with taxpayers with modest income.
However, the tax credit has been tried to be misused by many taxpayers, which becomes a reason why the IRS keeps a close tab on taxpayers to receive this tax credit.
Large Charitable Donations
The IRS keeps a close tab on returns with large charitable donations and scrutinizes it closely with the income reported on the tax return. Therefore, those of you who are looking forward to a tax break for the donations made by you, should be vigilant and know that the IRS looks at such donations carefully to detect any tax fraud.
The tax break which comes with making charitable donations comes in one of the few tax deductions remaining. To claim it, you would be required to itemize your deductions. The only way this would make financial sense is if all your deductions exceed the standard deduction. The standard deduction for the 2019 tax cycle was $24,400 for married couples and $12,200 for singles.
The taxpayers facing problems in itemizing their deductions bunch their charitable contributions and pay two years worth of charitable donations in just one year to get the tax deduction. But, the IRS has a clear clue about how much a taxpayer can donate seeing their income range. So, if the donations made by you are higher than what you can make, then the IRS will surely detect it.
Nonetheless, if you have proof of all the donations made by you, then you need not fear the IRS. Just keep the limit of making contributions, i.e., you can make cash donations of up to 60% of your gross adjusted income to qualified charities. There are different limits for different types of charities which shall be explored by you before planning to make charities to save taxes.
The Bottom Line
Aiming to make use of all the tax credits and breaks available to you is a smart call, but only if you have documents to support all your claims. Every taxpayer tries to make the most of available credits, but it’s wise to double-check everything you claim, including the income you report or the charities you make.
You shall ensure to check your name, address, contact number, Social Security Number, etc. before filing your tax returns. Keeping a close eye on such things will help you have a seamless tax filing experience and get you all your tax refunds on time.
To understand better how to claim such deductions and earn the tax credits to save big on your hard-earned dollars, you can contact the MyTaxFiler expert and save big on your 2019 returns.