Ten Common Tax Audit Flags
What Does the IRS Look for Before Auditing an Individual?
Over one million taxpayers are audited each year, but your chances are only 2%. What types of things will increase your chances of being audited?
Each year, the IRS (Internal Revenue Service) audits approximately 1% to 2% of tax returns filed. When your tax return is submitted, a computer processes it. When your return has errors, does not fit in with statistical norms or is unusual in any way, it can be flagged by the computer, meaning that it must be manually reviewed. Although not all returns that are manually reviewed are audited, it is from this pool of returns that audits are often chosen.
What triggers an audit can change from year to year, however, there are a number of situations that can increase your chances of being audited:
- Being in a higher income bracket. Individuals who make between $25,000 and $100,000 are audited at a lower rate than those making over $100,000.
- Using round numbers. For example, if you have a tax deduction of $1992.00, use $1992.00; don’t round out your deduction to $2000.00. It is improbable that deductions will end up as round numbers.
- High charitable contributions. Contributions will be compared to the average gifts of people within your tax bracket. If yours is statistically higher, it will raise a flag.
- Not reporting income. Each person who sends you a W2 or 1099 must also send it to the IRS. If you do not include all of your income, your return will be reviewed for accuracy.
- Mathematical errors. If your numbers do not add up correctly, someone will need to review your return to determine where the error is.
- Missing information. When your return does not have complete information, the computer will flag it for review to determine what information is not included.
- Low income. If your income is statistically lower than other people in the same occupation your return may be checked for this and other inconsistencies.
- High deductions. Although you should take the deductions you are entitled to, taking a high amount of deductions will flag your return for review.
- Home office. Working from home offers tax advantages but make sure you are aware of the regulations surrounding deductions for home offices. This is a flag for the IRS.
- Being self-employed. You can reduce your chances of an audit by incorporating your business. If you are self-employed part time and filing a Schedule C while you have another job (especially if you show a loss of income), your chances of being audited grow.
Although this list is certainly not inclusive, it does provide some of the reasons the IRS double checks a tax return. If something unusual is seen during a manual review, your chances of being audited will increase.
Further Information
Tax Audit Flags for Small Business
Audit Risks for Home Businesses
References:
Five Audit Red Flags, CNN Money.com, Feb 2006
Are You a Candidate for an IRS Audit?, CIRE Magazine
An IRS Audit, Federal Citizen Information Center
