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The odds are pretty low that the Internal Revenue Service (IRS) will audit your tax return. But why take a chance? If you know the red flags that make the taxman raise his eyebrows, you can reduce the already remote possibility that he'll take a closer look at your 1040.
The IRS audited more than 771,095 tax individual returns filed during the 2019 calendar year, according to Jackson Hewitt Tax Service. That's less than 0.5 percent of the 154.1 million individual returns filed that year. Audits aren't always painful, either. Some result in refunds.
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Most audits are conducted by mail: The IRS spots something it suspects is wrong and sends a letter explaining the problem or asking for additional information. (The IRS never starts an audit by phone; if someone calls you and threatens an audit, it's a scam.) The IRS conducts about 26 percent of its audits of individual returns in person.
Even though the odds of an audit are extremely low, most people would prefer not to undergo one. Here are some of the most common reasons the IRS selects returns to audit:
The IRS does indeed check your math. It also gets copies of your tax forms from employers, banks and other financial institutions. You’ll also get a notice (Form 1099-G) from your state if you’ve collected unemployment benefits, which are taxable. If you don't add up your income correctly, or if you put the wrong amount from a W-2 form, you'll hear from the agency. You'll also hear from the IRS if you neglect to include a W-2, 1099 or some other tax notice from a third party. “It's the most common notice that goes out,” says IRS Director of Examination Scott Irick.
Technically, these notices aren't audits, but they are one surefire way to get your tax return kicked back. Don't ignore them.
Incidentally, if you’ve sold cryptocurrency for profit, those gains are subject to capital gains taxes. The IRS is using data analytics to track compliance, so don’t think your trading activity has gone entirely unnoticed.