Seven helpful hints to avoid getting audited

The majority of tax payers’ efile their tax returns using tax preparation software. It is really cheap and easy it use. It also increases your odds of receiving an audit notification letter. The tax department wants to reduce the amount of paperwork that it receives so it will spot check around 20% of all returns. They will send out letters asking for some of your receipts. 

No need to panic but it is very important to avoid red flagging your account by making unintentional errors. A simple error of entering the same receipt twice may increase the chances of receiving an audit letter the following year.

What can trigger an audit?

Home office, hobby claims

Blurring the lines on your home-based business expenses is never a good idea. Remember, you can’t claim home/office expenses if your work area is not used exclusively for business. Also keep in mind that a hobby — such as reselling antique rocking chairs on eBay — remains a hobby and is not a “business” if you haven’t made any money on it this year … or last, or the 5 years before that.

Business Use of a Vehicle

The tax man is very skeptical of claims that taxpayers are using their cars 90 percent for business. Two of my friends are currently going through an audit regarding their deductions for vehicle expenses. In Canada, you must keep a mileage log, the CRA requires actual gas receipts and doesn’t accept the amounts on credit card statements.

Reporting large losses

Auditor’s ears prick up when they hear that you’re claiming a big loss. File paperwork for a business or trading loss often enough and expect to attract their attention. Losses on real estate holdings also hold particular appeal for auditors.

Working in a high-fraud field

Auditors reportedly show extra interest in tax returns from people working in certain fields of employment that are statistically more prone to fraud or at least fudging figures. These include home renovations, commission sales people, self-employed and restaurant servers.

Installment payments

If you are consistently underpaying your taxes year after year and can’t offer a good explanation as to why, you might get the tax man wondering if you deserve closer scrutiny. Don’t ignore instalment requests or reminders, paying them something is better than nothing at all.

Questionable deductions, credits

Claiming a lot of implausible or questionable deductions and credits on your tax return will raise eyebrows. Among deductions, it seems home, charity and alimony claims spark the greatest auditor interest.

Missing income

Thinking about not reporting substantial freelance earnings, tips, etc., especially if whoever provided the payout may be reporting the amount to the federal government. Don’t forget about your foreign bank account or earnings? Just because you earned or saved it overseas doesn’t mean it’s “free money.” Its better to be safe than sorry.

Having multiple sources of income or making too much

The more you make, earnings that fluctuate a lot or if you have a complicated return creates more interested by auditors in your return. According to Intuit TurboTax, 12% of millionaires earnings more than $1 million annually are getting an audit notification letter. (I would love to have that problem)

Just remember to keep good records, educate yourself regarding the tax code and when in doubt consult with an accountant.

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4 thoughts on “Seven helpful hints to avoid getting audited

  1. Another great post – and very timely. Each year I claim driving mileage for my side sports writing jobs and each year I worry that I’ll be audited. It really helps in terms of my financial return and I don’t want to give that up, but maintaining strict records of each event I drive to cover is a huge pain. So far, I have yet to be audited and am hoping it never happens.
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    • I wouldn’t worry, worse case, the IRS will ask you to mail in your log book to justify your car expenses. Just make sure that your log book has the required information. (date, destination from – to and mileage.

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  2. Very good advice. I use TurboTax and they have two features which I like: one is an audit risk assessment (always scored a low risk for me at least) and the other is an extra service to represent you if you do get audited. I have never paid for the extra service and have never been audited, so I don’t know if it is worth while or not.

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    • Hard to say if the extra service fee to represent you in case of an audit is worth it. Most audits are just letters requesting more proof. If you keep accurate records with no math errors then you have nothing to worry about. You would have to be in a high income bracket to see an actual auditor in person.

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