Top reasons that could prompt the IRS to select your tax return for an audit
What: Today, the Internal Revenue Service (IRS) audits about one half of one percent of individual tax returns. The IRS does not reveal all of the details that go into having a tax return selected for audit, but for some categories of individual taxpayers, the odds of being audited can be much higher. The US Congress is also considering additional funding for the IRS to help it increase its audit activity.
Why: Depending on the scope of the audit, it can be a costly and time-consuming process. An audit can be as simple as responding to a letter from the IRS pointing out a problem or it can be a full-blown audit with a requirement to provide full supporting documentation for items claimed on tax returns. Some of the factors that could prompt the IRS to consider you for audit include:
- Obvious errors in completing the tax return. Errors such as missing Social Security numbers, missing signatures, ghost dependents, or incorrect addition or subtraction are frequently caught by a computer and result in an audit letter requesting correction of the error
- Failure to report all income. The IRS will be checking to see if all income reported on Form W-2 and Form 1099 are included on the tax return. The IRS will also look closely at jobs involving tip income and other cash-based sources of income. US Congress is also looking at additional third-party reporting to help it track additional sources of income
- Claiming excess deductions. The IRS computers look for returns claiming more than the usual amount of deductions for a typical taxpayer with that level of income, such as charitable deductions or Schedule C business deductions
- Failure to keep up with tax law changes. Just doing what you did last year on the tax return can lead to an audit if you fail to realize the law has changed, for example changes such as unreimbursed employee business expenses that are no longer deductible or casualty and theft losses that are not federally declared disasters and are no longer deductible
- Using a tax return preparer that has had a history of problems with the IRS. The IRS will look closely at tax returns prepared by a return preparer with whom the IRS has found errors or even perhaps fraud in the past. On the other hand, utilizing a return preparer with a positive record with the IRS can reduce your odds of getting audited
- Earning a lot of money. Statistics show that the more income you report on your tax return, the greater your chances of being audited since the IRS devotes its limited audit resources to where it can get the most return for the time expended
- Engaging in problem transactions. The IRS will look more closely at returns where there is a history of problems such as Schedule C filers, claiming a home office deduction, engaging in listed transactions such as a syndicated conservation easement or an abusive Roth IRA transaction, or reporting involvement with foreign accounts or cryptocurrency transactions
- Claiming refundable credits. While many taxpayers, especially lower income taxpayers, are entitled to refundable credits such as the Earned Income Tax Credit or the Additional Child Tax Credit, such refundable credits often are accompanied by a higher percentage of fraud and draw closer attention from the IRS
- Filing a paper return. IRS statistics indicate that paper returns have a much higher error rate than electronically filed returns, resulting in the IRS paying closer attention to them
- Having been audited in the past. Problems with the IRS in prior years can lead to continuing focus from the Service, particularly where there are items that can affect more than one year, such as depreciation or a home office deduction
Who: Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst, for Wolters Kluwer Tax & Accounting, can help discuss the triggers that increase the chances of being audited by the IRS and what steps individual taxpayers can take to help decrease the likelihood of an audit.
PLEASE NOTE: These materials are designed to provide accurate and authoritative information in regard to the subject matter covered. The information is provided with the understanding that Wolters Kluwer Tax & Accounting is not engaged in rendering tax advice or accounting, legal, tax or other professional service.
Contact: To arrange an interview with Mark Luscombe or other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.
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