Each year, the IRS audits over 1 million tax returns. With agency resources shrinking, the IRS is more selective when choosing 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 - $200,000. As your income moves toward the extremes in either direction, the chance of audit increases.
You fail to report all your income. The IRS Automated Under reporter 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 additional 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 necessities for income and expense substantiation.
You make a math error. The IRS identified over 2.5 million math errors on 2016 returns. The biggest culprits are tax 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, 24 percent or $16.8 billion in EITC payments were issued improperly in Fiscal Year 2016. 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.