Posted by : Daniel Stoica in (Blog, Tax Preparation, Tax Return, Tax Tips) On: June 30th, 2011
One of the most common questions asked at tax time is, “How do I avoid being audited?” The question itself is more common than the probability of actually being audited. Only 1% of all taxpayers have actually been audited.
When you know what information on your return will trigger an audit, it will help you to avoid one. It is by no means a guarantee, but it will definitely reduce your chances. By looking at past audits, you will see what common issues you need to take a close look at.
High deductions – Deductions that are unusually high compared to your income sends a red flag to the IRS. They annually publish the “Statistics of Income” and, although the book offers a range for typical income, you have to use common sense here. If you are at the lower spectrum of the income bracket, and you happen to claim high deductions in association with that lower bracket, you might trigger an audit, despite the fact that the deductions may be valid.
High Income – Higher income is usually considered an advantage, but from the IRS’s perspective, it causes them to look a little closer, which can be a disadvantage. Past audits show that a chance for an audit of a taxpayer who makes less than $100,000 is 0.93%, whereas a taxpayer whose income is over $100,000 has a 1.77% chance of being audited. With income over $200,000, your potential for an audit jumps to 2.87% and anyone who makes $1 million will have a 9.37% chance of being audited.
Cash Income – When you work in a profession where you handle cash, such as receiving tips, it makes the IRS curious. They will most likely compare your bank deposits and the income you have claimed on your taxes. If they don’t add up, you may find yourself being audited.
Self-Employment – Self-employed taxpayers tend to write-off as many expenses they can in order to keep as much of their money as possible. The IRS is sure to verify that these expenses and deductions are legitimate.
But just because some items on a tax return might trigger a red flag with the IRS, it isn’t a guarantee that you will be audited. Your best bet to avoid an audit, though, is to expect that it will happen. Make certain that your deductions are correct and you have a record of every expense and pay stubs to show the IRS, just in case.
Of course, not having to deal with an audit is the best thing that could happen, and if you keep yourself apprised of the issues the IRS looks at, you will avoid that letter from them.