Many tax payers fear an audit. And, audits are worth fearing, since you can expect to spend lots of time justifying and proving your deductions if you undergo one. But, understanding IRS tax law and how returns are chosen for audit can help allay some of your fears. First, of all, it’s important to understand that your overall chances of undergoing an IRS audit are less than 2%. However, that being said, some individuals run a slightly higher risk than others, based on certain factors.
The IRS lacks the resources to examine a large number of returns, and to do so would not be cost effective. So, they look for people who meet certain criteria, appearing more likely to have broken IRS tax law, and they audit some of those returns. Here are some red flags the IRS looks for that, to them, might indicate that you’re more likely to have broken IRS tax law. Higher Income Means a Higher Chance of Audit – When your income exceeds $100,000 your chances of an audit increase from less than 1% to about 1.5%. Your chances are even greater if you have an income over $100,000 and you
• Work in a business that is likely to receive tips
• You claim large charitable deductions in relation to your income
• You have complex tax transactions on your return, but you don’t explain them
• You have large business expenses in relation to your income
Large Itemized Deductions May Mean Higher Chance of Audit – The IRS tax law and the rules that the IRS uses have targets for deduction amounts based on income ranges. If you have large itemized deductions that exceed the targets that the IRS expects to see on a return, you are more likely to be audited.
Self Employed People Are More Likely to be Audited – The IRS believes that those who are self employed are more likely to under report their taxable income and over claim deductions, failing to follow IRS tax law. Therefore, the self-employed are more likely to be audited. In addition to the self employed, people who are more likely to be paid in cash are also more likely to be audited. This includes careers like taxi cab drivers and waiters.
Those Who Report Business Mileage – One of the most commonly audited groups of people audited are those who report their mileage on their tax returns. If you use your car for business, this is a deduction you should take – but it’s critical to keep good records. You should keep a detailed mileage log showing each date that you travel for business, the purpose of your trip (list the client’s name if you’re visiting clients) and your beginning and ending odometer reading for the day. This won’t decrease your chances of an audit, but it will ensure that you’re prepared to defend your deductions.