Is audit proofing for everyone?

Being audited, as an individual taxpayer, means being asked to verify or substantiate all your tax credits and deductions. Therefore, when you audit proof yourself, you are putting everything in place so that you successfully complete the verification process. In terms of who the IRS likes to select for an audit, no one is safe. It could be you, it could be your neighbor or your boss. If everyone can be selected, everyone must, thus, be prepared to win.

For a long time, people believed that it is only businesses that the IRS scrutinize. This is not true. The IRS, in the first place, does have computer systems designed to detect several tax issues. This happens to every filer (both individuals and businesses). Examples are the Discriminant Information Function (DIF) and the Automated Underreporter (AUR) Program. The DIF is used to detect any suspicious data in returns. For example, if a child is claimed twice, it will raise an alarm. On the other hand, the AUR is used to catch individual filers who lie about their income. For example, your employer does provide information about how much you earn to the IRS. If what they get from your employer is more than what you declared on your income tax return, the system will signal the IRS.

As such, we all are vulnerable to an audit. We need protection, something we can do for ourselves by being audit proofed. If wondering how to do this, do not worry. I will be presenting my Audit Proof Masterclass on July 29, 2021. Be sure to book your seat and learn from my excellent experience about the subject.

Are individual taxpayers afraid of being audited?

I would say yes, I have seen people fearing being audited. I understand that people who are scared know that they would have done something wrong. But you can also fear an audit because you are not ready for it. Again, being ready for an audit is to have all information (paperwork, invoices, and receipts) that support the tax credits and deductions you claimed. For example, if you donated some gifts to charities, there must be some form of paperwork supporting this. The same applies when you claim the Child Tax Credit, there must be paperwork to substantiate your claim.

What makes the IRS audit individual taxpayers?

Just like businesses, individual taxpayers enjoy a variety of tax benefits. These are in the form of refundable tax credits and itemized deductions. Even though many individuals like to claim the standard deduction, itemized deductions are a clever way to reduce your tax bill to almost zero. That is why millionaires pay very minimal taxes on their individual returns. They understand the rules and how to benefit from itemized deductions.

However, claiming itemized deductions invites scrutiny. The IRS always wants its money, so they will not let you get away with it easily. But, if you are ready, you can always beat them. So, what are some of IRS audit triggers?

Too many charitable donations

The IRS understands that every individual works and makes reasonable income that suits their standards. Therefore, they do not expect you to donate about 80% of your income to charity. This means you will be living on 20% of your earnings alone? What about your rental fees or housing costs? Medical expenses? The food you eat? Therefore, be wary how much you say you donated from your income.

On the other hand, charitable donations may be in form of physical items that you give away. These are from your house, or garage to those in need. Examples are an old couch you no longer use, clothing items, or even your old car. Again, the IRS knows that you cannot give away everything you own and start afresh. Too many of them will raise an alarm.

Suspicious claims – Child Tax Credit

This is because of the rampancy of identity theft cases that have been taking place around the U.S. identity theft crimes are much higher for children, for example, over  million cases were reported in 2017. Criminals steal these identities and sell them to willing individuals who either apply for loans using these names or use them to claim the Child Tax Credit. Therefore, if you claim a child who has been claimed by someone else, the DIF system will notify the IRS about you.

Underreporting your individual income

The IRS uses your information returns to determine if you are lying about your income. This entails using your income data from other sources, for example, your employer about the income you make. When filing your federal income tax, whatever figure you write down as your income must match what your employer provided. If not, the IRS has a computer system that can detect that. You will then be audited or penalized.

But all the above can be avoided by ensuring that you are audit proofed. I will be presenting my Audit Proof Masterclass on July 29, 2021. Be sure to book your seat and learn direct from me how to reduce your tax bill and never worry about being audited. Register now and catch the mouth-watering more than 50% discount. The price will go up on July 9, 2021.

People have also asked the following

     1. What Is an Itemized Deduction?

These are expense items that you can deduct from your Adjusted Gross Income (AGI). They reduce your total taxable income so that you pay less taxes than taxpayers who choose the standard deduction.

     2. How Might Tax Reform Impact Itemized Deductions?

Tax reform depends on the administration of each president. Unfortunately, political office holders change from time to time. As such, one might adversely impact your itemized deductions and find yourself paying more taxes. Some, however, have favorable tax reforms that result in you paying less taxes.

     3. Who Benefits from Itemized Deductions?

Ideally, everyone benefits from itemized deductions. But over the years, it has been clear that it is the high-income earners that are likely to itemize and benefit the most.

     4. What is the difference between standard deductions, itemized deductions, and above-the-line deductions?

The standard deduction is a fixed dollar amount that you can deduct from your taxable income. It varies according to your filing status. Itemized deductions, on the other hand, are not fixed. They are derived from deductible expenses you would have incurred during a tax year. They reduce your taxable income more than the standard deduction. And, above-the-line deductions are deductions made by a taxpayer to arrive at their adjusted gross income (AGI), before factoring in the standard, or itemized deductions. An example is that of retirement plan contributions.

     5. What it means to have itemized deductions on your tax return?

Having itemized deductions on your tax return means a lot of things depending on what you are looking for. If you are concerned about reducing your tax bill, then it means you, indeed, reduce it, depending on your lifestyle and what you can itemize and deduct. In terms of audits by the IRS, itemizing deductions might bring scrutiny on you. Therefore, it means you must audit proof yourself, keep proof to validate your deductions, in case the IRS wants it.

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