Is it already time to talk taxes?
You bet it is. Most 1099 forms have already gone out and everyone should be organizing their paperwork and getting ready to pay the taxman. Today I want to tell everyone how to get audited.
How to get audited? Who wants to get audited?
No one wants to get audited, which is why you should do the exact opposite of what I’m about to say. The risk of getting audited is fairly low, but it is an enormous hassle, and it can happen to the best of us.
The most common and entirely preventable reason for an audit is mistakes on your tax form, and the most common mistake year after year is failing to sign and date your income tax form. Now, this kind of mistake doesn’t necessarily trigger an audit, but at the very least it delays the process (and your refund!) as the IRS doesn’t accept unsigned returns. Remember also that when filing jointly, both spouses must sign. It’s best to file electronically because the tax software can catch a lot of mistakes—math mistakes are also very common. An error-free return means faster and processing by the IRS and a faster refund check for you.
Want to know a great way to get audited? Don’t file your taxes! The IRS will surely come knocking. Even if you don’t owe the government money, you frequently still need to file a return. Another red flag for the IRS—aside from not filing at all—is not reporting all of your income. This includes alimony income, rental income and self-employment income. If you got a check, you need to report it, and if you don’t, you could pay a lot more with interest and penalty charges.
What about filing late? Does it hurt you to file for an extension?
It doesn’t hurt you to file for a six-month extension, but the extension is to file—not to pay. What really hurts you is burying your head in the sand and not filing for the extension. The IRS will hit you with a late-filing penalty equal to 5 percent of the taxes you owe for each month or part of a month for up to five months. Don’t be late without filing for that extension! Unless, of course, you’d like to get audited. Being late is a great way to pursue that.
How about filing early?
Because IRS audits are sometimes focused on those who file late, people think there’s an advantage to filing your tax returns early. That’s not necessarily true. You know how the first person to arrive at a party sticks out? Some people speculate that filing early increases your chances of an audit as the IRS has a smaller pool of returns to go through. The truth is that timing really isn’t what matters here. It’s about accuracy. Filing early has some advantages, like getting your refund check sooner, but the risk is that if you rush to get that return in and make a mistake, you’re more likely to be audited. The IRS is less concerned about timing and more interested in accuracy…and the bottom line. The best way to get audited is simply not to pay.
Remember Leona Helmsly? The billionaire her told her housekeeper, “We don’t pay taxes. Only the little people pay taxes…” She ended up in prison. And be it fate or a particularly poetic execution of justice, she was ordered to report there on April 15.
Speaking of the uber-rich, another factor that ups your chances of getting audited is earning a high income. The IRS knows that the big money is with the big earners, which is why only 1% of overall taxpayers were audited in 2011, compared to 30% of those earning $10 million or more.
Big expenses are another common reason for an audit. There’s an old saying at the IRS: “Look at T & E and out by 3.” Travel and entertainment expenses are potential audit triggers because they blur the line between business and personal. Claiming a large amount of travel and meals as business deductions means you need to keep detailed records that document the amount, the place, the people attending, the business purpose and the nature of the meetings, down to what you talked about.
In that same vein, the home office deduction is often abused, and the IRS has cracked down. You can’t say your living room is a home office because you occasionally check your work email from the couch. The IRS says the room must be for work and work only to qualify.
You can’t mess with the IRS!
One final way to request an audit from the IRS is to make unusually large charitable contributions. Be as generous as you like, but know that it will raise suspicion if your donations are higher than average within your tax bracket, and be sure to obtain all the proper documentation to back up your deductions.
Okay, so what if we follow all of your advice and manage to get audited, what then?
It’s a dreaded event, but it’s survivable. The vast majority of audits are by mail, and if you’re prepared, honest and organized, you’ll be just fine.
Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.