You had a couple of extra weekend days to complete your 2015 tax return, thanks to the fact Washington, D.C. celebrated Emancipation Day last Friday. You're ready to mail it in or e-file. Before you drop it in the mailbox or hit "send," you might want to do another last-minute appraisal to avoid every tax payer's worst nightmare — an audit notification letter from the Internal Revenue Service — a bit later in the year. How to avoid this bad dream and keep sleeping soundly after you've turned in your return (or filed for an extension) today?
CNBC.com did a little research, and here are 10 of the top reasons cited for taxpayers finding themselves on the receiving end of unwanted IRS attention. Do your best to not be guilty of these missteps, where possible, and you'll likely avoid an audit in 2016 and beyond.
— By CNBC's Kenneth Kiesnoski
Updated and re-posted 18 April 2016
Claiming a lot of implausible or questionable deductions and credits on your tax return will raise eyebrows at the IRS. Among deductions, it seems home, charity and alimony claims spark the greatest auditor interest, while for credits it's the Earned Income one that might land you in hot water.
Financial advisors say it's never a good idea to tap into tax-advantaged retirement savings early, as you face not only tax payments and penalties but also miss out on the growth opportunities compound interest affords over time. Worse still, taking 401(k) plan or individual retirement account money out early might prompt an IRS audit letter along with your higher tax bill. That's because the feds have found that 40 percent of those withdrawing retirement money before age 59½ tend to make mistakes on their tax returns.
Thinking about not reporting that casino jackpot you hit last year in Vegas? Think again. Same goes for substantial freelance earnings, tips, etc., especially if whoever provided the payout will be reporting to the federal government. Better safe than sorry.
Fill out your tax forms properly. Getting the basics wrong on your 1040 — whether it's writing in your Social Security number or tallying up your expected refund amount — may very well get the IRS wondering what else is off in your financial world.
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. Same goes for claims on vehicle use; the IRS is very skeptical of claims that taxpayers are using their cars 100 percent 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 10 years before that. So don't make any claims against what's really a simple pastime.
Ears prick up at the IRS when auditors hear that you're claiming a big loss. File paperwork such as a Schedule C for a business or trading loss, or a Form 5213 — which buys you five years' breathing room while you try to turn that hobby into a business — often enough and expect to attract their attention. Claims of losses on real estate holdings also hold particular appeal for auditors.
Forget to tell the IRS about your foreign bank account or earnings? Expect a letter from 1111 Constitution Avenue in Washington, D.C. (that's IRS headquarters). Just because you earned or saved it overseas doesn't mean it's "free money." International accounts with more than $50,000 must be reported on Form 8938. Even Americans living and working abroad must file tax returns and ante up each April.
The more you make, the more interesting IRS auditors find you. If you earn more than $200,000 a year, you're more likely than the average taxpayer to face an eventual audit. According to Intuit TurboTax, while only 1 percent of U.S. citizens earning less than that amount are audited, 4 percent of those above that benchmark are. Millionaires fare worse, with a reported 12.5 percent of those earning more than $1 million annually getting an audit notification letter.
IRS 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 on annual 1040 forms. These include (according to financial advisor Ray Martin, as cited in "The Houston Chronicle") employees at car dealerships and — a bit ironically — tax-preparation service firms.
If you are consistently underpaying your taxes year after year and can't offer a good explanation as to why, you might get the IRS wondering if you deserve closer scrutiny. If you didn't withhold enough taxes again in 2015 and can't pay in full up front this year, be sure to fill our Form 9465, Installment Agreement Request, to forestall problems down the road.