Tax Audit Avoidance Tip: Seek Precision Where Possible

Precision is important in any complicated activity. But the transaction costs involved in spending the time to dot every i and cross every t can be significant too. When it comes to adding up expenses for itemized deductions on a federal tax return, is it really necessary to calculate every expense down to the last penny?

The answer to this question is important to taxpayers in Texas and across the country. It is important because, if the IRS deems your return to contain too many zeroes, you may be at increased risk of being audited by the IRS.

Being precise doesn’t necessarily mean calculating everything to the last penny. For itemized deductions such as unreimbursed job expenses, rounding off to the nearest dollar is generally considered okay.

But the more zeros you add, the more your chances of raising a red flag for an IRS audit may go up. For example, let’s say a taxpayer submits a return that contains an itemized deduction of $2,000 for job search expenses. The presence of the three zeros can seem suspicious to the IRS. In their eyes, it may look as if a taxpayer were merely picking a number out of the air rather than rounding off a real number in good faith.

To be sure, maybe the number really was $2,000. That could have been the amount at which a taxpayer chose to cap his or her expenses for the activity in question. But the IRS tends to play the averages, and so to them the amount may appear suspicious.

Source: “12 tax audit red flags – Your return has too many zeroes,” Money, 3-21-13

To learn more about our practice, please visit our page on IRS tax audits.