AN ARGUMENT AGAINST USING ROUND NUMBERS ON YOUR TAX RETURN

When preparing your tax return, it's advisable to avoid using round numbers for deductions and expenses. According to our founder, a former IRS agent, an unusual number of round figures can raise red flags, potentially leading to an audit. This is because such numbers may suggest estimates rather than precise calculations. To minimize scrutiny, ensure all reported amounts are accurate and reflect actual expenses.

For a concise overview, you can watch the following video:

An argument against too many round numbers on your tax return.

Using too many round numbers on your tax return can increase your audit risk because it signals to the IRS that you may be estimating rather than reporting exact figures. Here’s why that’s problematic:

1. It Looks Like Guesswork

If your tax return is filled with numbers like $500, $1,000, or $10,000, it suggests that you’re rounding expenses rather than keeping precise records. The IRS expects taxpayers to report actual amounts from receipts, invoices, and financial statements.

2. It Raises Suspicion of Fabrication

While some expenses might naturally round to a clean number, having too many rounded figures can look artificial. The IRS might question whether you’re inflating deductions or not keeping accurate records.

3. IRS Algorithms Detect Patterns

The IRS uses data analytics and algorithms to flag suspicious returns. A return with too many round numbers could be seen as a pattern of estimated or potentially fraudulent deductions, increasing the likelihood of an audit.

4. Auditors Expect Detailed Records

If your return gets flagged, an audit will require you to provide supporting documentation. If you can’t back up your rounded figures with actual receipts, you may face penalties or disallowed deductions.

5. It’s Not How Real Expenses Work

Business and personal expenses rarely end in perfect hundreds or thousands. For example, your office supplies might total $497.68, not an even $500. Having more precise numbers shows you’re keeping diligent records.

Best Practices to Reduce Audit Risk

• Keep detailed records of income and expenses.

• Report exact amounts from receipts, invoices, and bank statements.

• Use accounting software or financial tracking tools to maintain accuracy.

• Avoid making up numbers to fit within deduction limits.

In short, while rounding occasionally is fine, excessive use of round numbers can make your return look less credible and increase your chances of getting audited. The IRS favors accuracy over convenience!