Assessing Your IRS Audit Risk

Assessing Your IRS Audit Risk

It’s an ever-present threat to Americans and one that has been compared to the ultimate stressors in life, such as a death in the family, divorce or job loss. As a taxpayer, it’s always a lingering question in the back of my mind. Am I at risk of an IRS income tax audit?

Even though the overall percentage of taxpayers who are audited is low, tax returns undergoing this scrutiny can be chosen at random. Thus, no American citizen is completely safe. And as your income goes up, so does your risk of an audit. In fact, according to statistics from the IRS Data Book for the fiscal year ending September 30, 2009, 6.4% of returns with a total income of more than $1M were audited.

Although your overall chances of being audited continue to be slim, there are a number of red flags to be aware of that can reduce your chances of getting real up close and personal with the IRS.

  • Among the more recent audit red flags is the homebuyer tax credit. Be aware that, due to fraudulent homebuyer tax credit claims in 2008, the IRS will be more closely scrutinizing taxpayer returns that claim this credit.
  • Also, starting this year, the IRS plans to take a closer look at online income from eBay and other auction sites. This is the result of a new law requiring banks and payment settlement companies that process credit cards, debit cards, and electronic payments to report amounts received by merchants to the IRS.
  • Beginning with specified securities purchased in 2011, brokers will be required to calculate gains and losses, classifying them as either short- or long-term, and report this information to the IRS. This new requirement is in response to security sellers overstating the tax basis to pay less tax.

Along with these new developments, there are a number of additional risk factors that you should be aware of.

  • Because the tax system makes it easier for self-employed individuals to underreport income and falsify deductions, the IRS goes to extra lengths to make sure the self-employed remain compliant. Recently, there has been a renewed effort in making sure income is properly reported, due to a Treasury Inspector General finding that a number of self-employed taxpayers were dishonest in their income disclosures.
  • Those who use automobile expenses as a deduction should be aware that this is a big red flag for the IRS. It is vital that those using a personal car for business keep a meticulous daily log of business mileage that includes odometer readings, dates, locations and meeting details.
  • High itemized deductions that exceed typical IRS ranges for your income group can significantly impact your chances of an audit.
  • Also, be aware that home office tax deductions should only be taken by taxpayers who use their office as a principal place of business. If you work at home intermittently, it’s best to forego this deduction.
  • Due to years of abuses, alimony has become a big red flag in terms of IRS audits. In terms of taxable alimony income, the deductions by one spouse will be matched by those of the other.
  • Make sure your return does not contain mathematical errors. Even a simple mistake can give the IRS a reason to further scrutinize your figures and lead to the dreaded audit.
  • Are your expenses too high as a percentage of your income? If you are making $40, 000 a year and have a $6, 000 monthly mortgage, the IRS may come calling on the assumption that you have unreported income.
  • Although not an uncommon scenario, married couples filing taxes separately are automatically at higher risk of an IRS audit. This is especially true for those with large itemized deductions that may be duplicated on both returns.
  • Generosity is a favorable trait, however make sure you do not claim charitable contributions that total more than what your income level warrants, or you could be the target of an IRS audit.

Keep in mind that the IRS has three years from the date you filed to collect extra tax, or six years for those who didn’t report more than a quarter of their income. And for those evading tax and filing fraudulent returns, there is no statute of limitations. These non-taxpayers can be audited by the IRS at any time.

Although it’s not always possible to avoid all audit red flags, being aware of them will help you avoid a fate many equate to losing a loved one. Although, in this case, the departed will most likely be a good chunk of your cash.

6 Responses to “Assessing Your IRS Audit Risk”

  1. Anonymous

    I was wondering what my chances of being audited are. I was married but divorced. Last year since my divorce wasn’t final, I filed with my now ex husband as MFJ. Afterwards tho, I moved in with my boyfriend and in our state, we meet all the requirements for common law marriage which also makes us able to file MFJ. I am worried tho that since last year I filed with one husband and this year with the new one, they might think it’s weird and flag my return.

  2. Anonymous

    I was audited a couple years ago. A quick call to the IRS, and I figured out what I did wrong. I sold a bunch of stock that I had amassed through purchases out of my paycheck — and I filled out the forms calculating the cost basis for all 80+ transactions. It ended up being five pages of forms…

    Turns out the IRS just wanted a single entry that said ‘various’ for date purchased, with the average cost basis declared. I guess the poor IRS guy just chunked my forms in the trash instead of keying in all that data…LOL

  3. Amazing that the contribution receipts wouldn’t be enough. People must go to great lengths to falsify things, otherwise you’d think they’d accept your documentation at face value. Good luck.

  4. Anonymous

    I am currently in the midst of a 2009 tax year audit, of which the IRS is challenging my itemized charitable contributions (which were cash contributions of 11% of my gross income, hence probably the reason I got flagged). I am in the second round of answering the IRS’s questions, which is extremely annoying. My initial 6 pages of documentation from the charities was not good enough, so the IRS asked for lots of extra stuff I didn’t think was necessary, like all my monthly bank statements, photocopies of all cancelled checks and signatures of charity representatives. In all, I had to generate over 100 pages of documentation!

    What really annoys me is knowing how much time the taxpayer funded government employees are using to read the 100+ pages of documentation they demanded. Go chase the real violators!

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