Each year,
the IRS audits over 1 million tax returns. With agency resources shrinking, the
IRS is more selective when choosing which tax returns to audit. Knowing what
the IRS is looking for can help you understand and reduce your audit risk. Here
are five of the biggest reasons the IRS may choose to audit your return:
- Your income is high or low. The reasoning is simple – higher earnings may lead to
bigger errors and lower earnings may mean incorrect deductions. The
adjusted gross income (AGI) range with the least audit risk is $25,000 to
$200,000. As your income moves toward the extremes in either direction,
the chance of an audit increases.
- You fail to report all your income. The IRS Automated Underreporter Program matches W-2
and 1099 information with the information you report on your tax return.
When a mismatch occurs, expect to receive an automated CP2000 notice from
the IRS notifying you of the discrepancy and the additional tax amount
due.
- You own a business. Rules regarding business deductions are confusing and
constantly changing. The IRS knows this. Incorrectly deducting personal
expenses or having your business classified as a hobby, thereby
eliminating deductions, can get you in trouble with the IRS. Cash heavy
businesses are under increased scrutiny due to higher fraud rates. Solid
tracking processes and good records are necessary for income and expense
substantiation.
- You make a math error. The IRS identified over 2.5 million math errors on
recent tax returns. The biggest culprits were tax liability and credit
calculations. Math errors can create a two-fold problem for you –
additional tax owed and more scrutiny applied to other parts of your tax
return.
- You claim the earned income tax credit. According to a report by the U.S. Treasury Department,
21 to 26 percent EITC payments are paid in error. Numbers that large are
sure to get the IRS’s attention. Eligibility confusion and calculation
errors are mostly to blame.
While some of the
risk factors are out of your control, many can be minimized. If you are chosen
for an audit, don’t deal with the IRS alone – please call for help.