Factors Affecting IRS Audit Risk
Ever wonder why some tax returns are audited by the Internal Revenue Service while most are ignored? Short on personnel and funding, the IRS audited only 0.86% of all individual tax returns in 2014. And the 2015 audit rate will definitely fall even lower as the agency’s resources continue to shrink. For example, funding for enforcement in the IRS’s current budget is 5% less than last year. So the odds are pretty low that your return will be picked for review.
That said, your chances of being audited or otherwise
hearing from the IRS escalate depending upon various factors, including your income level, the types of deductions or losses claimed, the business in which you’re engaged and whether you own foreign assets. Math errors may draw IRS inquiry, but they’ll rarely lead to a full-blown exam. Although there’s no sure way to avoid an IRS audit, these 9 red flags could increase your chances of unwanted attention from the IRS.
- Making lots of moneyOverall individual audit rate is 1 in 116
- Individuals with $200k or more audit rate is 1 in 37
- Individuals with $1 Million or more audit rate is 1 in 13
- Underreporting income
- Taking higher than- average deductions
- Claiming 100% business use of a vehicle
- This is especially high risk when no other vehicle is available for personal use
- Keep detailed mileage logs with a date and purpose for every trip
- Actual expenses OR mileage may be deducted
- Writing off a hobby loss
- If your activity generates profit 3 out of 5 years it is considered a business and losses can be deducted
- Reporting large charitable deductions
- Running a small business
- Additional IRS scrutiny given to cash-intensive businesses
- IRS focusing away from large corporations and towards
- Deducting Business Meals, Travel and Entertainment
- Be prepared to provide records that document amounts, places, people, and purpose.
- Claiming the home office deduction
- The space must be used exclusively and regularly as your principle place of business
Information from Kiplinger’s Personal Finance Adviser May 2015 was used in this blog post. For specific questions about your audit risk, please contact us.
