The two major concerns for taxpayers continues to be saving as much money as possible on taxes as well as making sure they aren’t audited by the IRS. With regards to getting audited, there are certain IRS provided statistics as well as high risk areas that should be noted.
Chances of getting audited
First, we thought it would be helpful to understand what your chances are for getting audited by the IRS. A few months ago, the IRS published its latest figures for fiscal year 2012, which covers the period of October 1, 2011, to September 30, 2012. The data includes information about the type and number of returns filed, taxes collected, enforcement, and the IRS budget, among other key statistics. As a whole, the IRS audited about 1% of all tax returns (business, personal, estates etc.) in fiscal year 2012. The latest figures indicate that the IRS examined about 0.4% of those reporting income under $200,000 who didn’t file a Schedule C, E, F or Schedule 2106, 2.8% of those reporting at least $200,000 and under $1 million, and 12.1% of the 337,477 tax returns reporting income of $1 million or more. It’s important to note that individuals with businesses are not included in these figures as the IRS has a separate process for examining returns with those activities.
What are the high risk areas?
This will vary by taxpayer, but there are general rules to follow. It’s also important to note that the IRS doesn’t publish specific statistics that detail at what point does your return become subject to an audit. Having said that, we can still isolate some of the risk areas and key situations.
Taking large deductions. High deductions in relation to your income can be an immediate red-flag to the IRS. If you have adjusted gross income of $45,000, but write-off $35,000 for mortgage interest and charitable donations, your tax return is likely to be put into the audit bucket. It’s important to note that the IRS assesses your deductions in relation to your income and to similar profiles of other filers. If other filers with comparable earnings have deductions that are far below the amount that you’ve claimed, your audit risk increases. This is not to say that you shouldn’t claim these deductions if you have the support and are entitled to do so. Just be aware of the risk for an audit. In addition, make sure you file all of the necessary forms. For charitable deductions in excess of $500, you need to properly file form 8283.
Failure to report income here and abroad. If you don’t report all of the income that you earned as documented in the W-2, 1099, K-1 & other forms you received after the end of the year, you run the risk of an audit. The IRS will note a mismatch if they receive a 1099 for income that you don’t report on your tax return. This also means that you are required to report foreign income and certain bank accounts. The IRS has cracked down on unreported foreign income by working with overseas governments and banks. As a reminder, you must file FinCEN Form 114 by June 30 to report foreign accounts that total more than $10,000 at any time during the previous year. Taxpayers with substantial assets abroad may also have to attach IRS Form 8938 with their returns.
Claiming your car entirely for business-use. Do you claim that your car expenses are 100% related to business? If so, that’s an immediate red flag for the IRS. Be prepared to provide detailed logs of the miles traveled, locations and other pertinent information to support this deduction.
Home office deduction and rental losses. Many taxpayers in the past have claimed the home office deduction either incorrectly or when they should not have done so. As a result, the IRS has focused on this area due to its audit success rate. If you qualify for the deduction, then by all means take it. Make sure you have your paperwork in order though.
Those taxpayers that own rental property and claim passive losses may also be at risk. The IRS will want to confirm that the taxpayer worked the necessary hours to claim the loss and meet the active participation requirement, especially in the instance that they are not a real estate professional.
If you’ve been audited because of another area, please feel free to comment below.
More Tax Questions? Browse Answers or ask your irs audit questions online.
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