It’s the middle of tax season, and millions of people have already filed their returns with the Internal Revenue Service (IRS).
Yet, due to recent budget cuts, your chances of being the target of a tax audit are even lower than last year.
However, that doesn’t mean you can cut corners when filing your tax return. An IRS tax audit can still happen, and the consequences can be steep.
IRS budget cuts lead to decrease in tax audits
The number of people selected for tax audits dropped for the sixth straight year in a row. That means just over a million people will go through the tax audit process for their 2016 return.
It’s also the lowest number of tax audits in over a decade. And the IRS says it’s due to huge budget cuts.
In fact, their budget has dropped by $1 billion since 2010. As a result, the IRS has decreased in size significantly.
What’s more, the IRS says the budget cuts are costing the U.S. government between $4 billion and $8 billion in uncollected taxes due to a lack of agents.
Why you still may get audited by the IRS
Just because you have a statistically smaller chance of getting audited doesn’t mean you can fudge your taxes. Tax experts like Josh Zimmelman of Westwood Tax & Consulting say you still need to be careful when you file.
“Audits may be on the decline, but that shouldn’t affect how people handle their tax returns,” Zimmelman explains. “As a general rule, people should always be careful on their tax returns and not be overly aggressive with their deductions.”
Zimmelman also says you definitely shouldn’t omit anything or alter anything despite reduced audit potential.
That’s because random audits still happen. And going through a tax audit can result in significant accounting and legal fees to represent your case.
“An audit is not something you want to risk, no matter how low the risk may be at the moment,” says Zimmelman. “A few dollars in tax savings is not worth the potential for IRS scrutiny.”
What triggers a tax audit?
While the IRS does select people at random for an audit, certain triggers can increase your risk. For example, the IRS tends to scrutinize wealthier individuals more heavily.
“Taxpayers who earn more than $1 million a year are at a greater risk for an audit,” Zimmelman says. “They typically contribute to more charities and take more deductions, which can result in a more complex tax return.”
But on the other end of the spectrum, if you qualify for the Earned Income Tax Credit (EITC), that can also increase your risk.
The IRS has recently implemented new policies to cut down on people falsely claiming EITC. Therefore, they may review returns from those who claim this valuable tax credit more thoroughly.
Essentially, the more complicated your taxes–and the more credits and deductions you claim–the more likely you are to face an audit.
“Typically the IRS spends more resources examining the tax returns of S-corps, partnerships, LLCs and sole-proprietorships than it does individual tax returns,” Zimmelman explains.
Other common triggers include home office deductions, large charitable donations, high level of deductions compared to your income, and hiring family members.
Beware these tax audit penalties
Before giving into temptation and cheating on your taxes (no matter how small the amount is) consider how severe the penalties can be.
According to Zimmelman, playing with the numbers to save yourself money can end up costing you in the long-term.
“If you don’t pay your tax liability by the due date, the IRS will charge you a late payment penalty,” Zimmelman says. “Even if you file on time, they may still charge you a late payment penalty if you under report your income and the IRS finds out. And they can easily find out since they receive copies of all the W-2s and 1099s that are issued to you.”
Additionally, if there are late fees, the IRS can charge you interest on the unpaid amount, adding to how much you owe.
Plus, if the IRS find you guilty of tax evasion (rather than making a genuine mistake) you can face serious fines or even criminal charges.
“Tax evasion is a felony and punishable by up to 5 years in prison,” Zimmelman states. “Failing to report foreign bank and financial accounts might result in up to 10 years in prison.”
Avoid shortcuts when preparing your taxes
Zimmelman stresses that fear of an audit doesn’t mean you should claim the deductions or credits you’re entitled to receive.
“If your tax claims look suspicious but are valid, you shouldn’t be afraid to report them,” Zimmelman says. “There’s no reason to pay more than you owe, just because you fear being audited.”
“If your deductions are legit and you have the documentation to back them up, then don’t be afraid to make those claims,” adds Zimmelman.
But just because there’s a decreased risk of an audit, that doesn’t mean you can take shortcuts. If you claim a deduction, make sure you have documentation or receipts and have them readily available.
Also, avoid estimating costs and instead report exact numbers. Being precise can decrease your chances of the IRS choosing you for a tax audit in the first place. Exact calculations also protect you in case an audit happens.
“Regardless of how high or low the risk of an audit may be, you should always do what you can to protect yourself,” says Zimmelman.
For more information on filing your taxes this year, take a look at the top tools you can use to file your return.