Let’s back up a minute. The way people talk about audits makes them sound like they’re always punitive. They’re not. The IRS simply double checks numbers because of the gap between what it receives in payments and what records suggest the agency is owed.
The IRS audits seven out of every 1,000 tax returns — and while some them are triggered randomly, others result from things the agency considers to be red flags.
Wealthy Scrutinized Most
Although people in every single tax bracket get audited, the agency scrutinizes the wealthy to a far greater extent than anyone else.
People who report no income also have a greater chance of being audited — that is, people who claim enough expenses to result in a net loss or no gain for the year.
While this was already true for the self-employed before the enactment of the Tax Cuts and Jobs Act, with the wording of the provisions for self-employment taxes challenging even tax professionals, it remains to be seen whether
What Triggers an IRS Audit
Beware of slipping any of the following things into your tax return, because they increase your chances of being audited:
- Claiming a home office
- Under-reporting income
- Too many charitable donations
- Too many work expenses
- Perfectly rounded numbers
- Math errors
If your tax return is completely truthful, you have nothing to worry about in an audit. Make sure that you maintain detailed records to substantiate the expenses and deductions you claim on your return.
Measure Your Home Office
But if, for instance, you claim space as a home office but also use the area for other things, that’s something to watch out for; another problem with this is overstating the size of a home office. The IRS has sent agents equipped with tape measures to calculate whether the claimed amounts for home offices match up with reality.
| 2015 Adjusted Gross Income | % Filed | % Audited |
|---|---|---|
| Negative to none reported | 1.70 | 3.25 |
| $1 to $24,999 | 37.45 | 0.80 |
| $25,000 to $49,999 | 23.21 | 0.49 |
| $50,000 to $74,999 | 13.20 | 0.41 |
| $75,000 to $99,999 | 8.52 | 0.52 |
| $100,000 to $199,999 | 11.72 | 0.62 |
| $200,000 to $499,999 | 3.38 | 1.01 |
| $500,000 to $999,999 | 0.54 | 2.06 |
| $1,000,000 to $4,999,999 | 0.25 | 4.60 |
| $5,000,000 to $9,999,999 | 0.02 | 10.46 |
| $10,000,000 or more | 0.01 | 18.79 |
| All returns | 100.0 | 0.70 |
Similarly, if you list something as a business expense but actually use the item for personal reasons, that could be a problem — retain all of the receipts that you claim on your return.
If anything, this has gained importance following the changes in the new tax law, which unfortunately contains a confusing cap on expense reporting by those who file as self-employed.
(For those who file as self-employed, only 20% of income may be deducted as expenses, and after that all income is taxable at the individual rate rather than as the self-employed rate, except that this phases out at a rather high income level; if the individual files to incorporate him or herself, that cap becomes a non-issue, but that paperwork needed to have been filed by the end of 2017 to apply to the coming tax deadline.)
Hire an Accountant
Long story short, if you have any kind of worry about possible tax audits, hopefully you are already working with an accountant on your taxes — it’s never too late to hire one.
Although some tax filing software includes a premium service option where a human tax professional double checks your returns, don’t construe that as insurance against being audited.
If for some reason you do receive a letter indicating the IRS wants to audit you, read it carefully and then head to the agency’s website to learn more — like the list of documents you need to prepare.
Readers, what concerns do you have about this coming tax deadline? Have you filed your taxes already — and what kind of advice are you hearing from your accountant?