When tax time rolls around, one of the biggest concerns for many taxpayers is how to avoid an IRS audit. For the average Joe and Jane Taxpayer earning less than $200,000 a year, the likelihood of getting audited is about 1 percent, according to IRS figures, and much of that is done by correspondence, indicating the IRS thinks you made a simple mistake, like a mathematical error. In fiscal year 2010, about 8 percent of taxpayers earning $1 million or more were audited, and that number jumped to 12.5 percent last year, with the majority of those audits conducted in person. The increased scrutiny on the wealthy comes from the IRS’s desire to close the tax gap – the amount of taxes due compared to what’s collected. The gap was $450 billion in 2006, the latest year for which figures were available.
What are some things that often trigger audits?
The IRS is looking for ways to increase the federal government’s take. If you have high number and dollar amount of deductions compared to others in your income bracket, an IRS computer program could select your return for an audit, in hopes of generating more tax revenue. You also could be a target if you receive much of your income in cash, as the IRS looks for those who are likely to under-report income.
Running a small business can also generate attention. Several years of losses on your Schedule C can draw attention, as can an unusually high number of business-related deductions.
You also should keep good track of your charitable deductions, particularly large contributions. Make sure to keep receipts from the from the charities to which you donate.
What if I have a lot of assets?
Your income and assets alone could be enough to put you under scrutiny, especially if they top $10 million. The IRS has created a special group to examine those with high wealth, with a focus on those with complicated business and investment structures.
Some arrangements that might bring you under the microscope are real estate investments, trusts, equity-sharing deals and privately held businesses. Having offshore income or assets or living abroad also could draw scrutiny.
More Tax Questions? Browse Answers or ask your tax audit questions online.
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