How to Avoid a Tax Audit in 2020
The IRS receives more funding in 2020. This is quite interesting for taxpayers as it means more employees will process tax returns and more employees will answer phone calls when you have questions. But that could mean that your risk of being audited will at least slightly increase as well. The Motley Fool says the increase in IRS resources also means the agency could become more aggressive in its auditing practice.
The federal news network noted that the fiscal 2020 budget passed in September is the largest in nearly a decade. But that doesn’t mean the IRS will have a solid fundraiser for a rainy day. The IRS will focus on modernizing its information technology systems as part of the reforms of the First Taxpayer Act of 2019 . This legislation is not only intended to make the agency more taxpayer-friendly; it also aims to prevent disruptions like the 2018 incident that caused the IRS Direct Pay site to be unavailable on tax day.
But back to audits. When the IRS decides to check your taxes, it’s not necessarily because it thinks you are trying to quickly tax Uncle Sam. Rather, an audit takes a close look at your tax returns because something out of the ordinary makes the agency make sure everything is correct.
As we stated earlier , it is unlikely that you will be selected for screening unless your income is very high. The IRS checked nearly a million tax returns for 2017, but that’s only 0.5% of all tax returns that year. A check can find that all your taxes are fair. Nearly 30,000 of these audited 2017 tax returns showed that the taxpayer was owed an additional refund.
To avoid verification , double-check your tax returns for typos or very large or small amounts that could indicate a sudden change. If you didn’t report any tax-deductible donations to charity last year, and this year you suddenly report donating $ 25,000 to your favorite animal shelter, that could be alarming to the IRS. Or, if you are reporting annual losses for a business for which you are filing Schedule C, the IRS may decide your business is a hobby.
Once you’ve submitted the file, that’s not all: you must keep a record of everything . Bank statements may not be enough to substantiate the amounts shown on your tax return, so save your receipts (physical or digital) and keep them in order if you are selected for a closer look. Most checks are done within three years from the filing date, so keep this in mind when you feel the urge to clean your filing cabinet.
These days, most inspections are conducted in absentia, which gives you time to gather the required materials before shipping them out. In-person field checks will be scheduled ahead of time so you can prepare – they won’t just show up at your door and demand to look through your shoebox of receipts.