The American Taxpayer Relief Act of 2012 was passed in order to ease the financial burden federal taxes pose for U.S. citizens, but finding the best way to reduce the amount of taxes one pays can still be difficult. Many Texas taxpayers are likely preparing their financial documents and developing strategies to accomplish this feat before tax season, but experts warn that certain missteps could make the Internal Revenue suspicious. If the IRS becomes convinced that one’s tax return does not add up, one could face a full-scale investigation and even an audit fraud case.
There are a number of common tactics that taxpayers in Texas and around the country use in effort to cut their taxes, but some of these practices could lead the IRS to launch an audit. Independent contractors and similarly nontraditional workers are tasked with keeping track of their own finances for tax purposes, creating for many a temptation to under-report their income in order to dodge taxes. However, the IRS has a sophisticated system allowing officials to check one’s stated income against data on other forms. Officials apply a score to each return based on its consistency, with particularly high values typically prompting full audits.
Some small business owners knowingly misreport their finances, assuming that their size will make them less likely to face an audit. However, experts say that the IRS generally pays close attention to any businesses with gross annual incomes of over $100,000, making such an assumption potentially dangerous. Companies with high levels of all-cash transactions are at even higher risk for audits, making it necessary for owners of such businesses to file their taxes with care. Any filers who are unable to back up a stated business expense with the appropriate documentation could find themselves targeted by an audit.
Many taxpayers attempt to lower their owed taxes by claiming a large number of deductions in order to qualify for Earned Income Tax Credit. However, experts say the IRS is aware of this tactic; in 2010, over 30 percent of audits involved questionable Earned Income Tax Credit claims.
Source: Business Insider, “Five Tax Mistakes That Could Have The IRS On Your Tail,” Stephanie Taylor Christensen, Jan. 24, 2013