Who Gets Audited the Most?
It is one of the most frequently asked questions of all…which taxpayers are most likely to be the subject of an IRS audit? Everyone wants to know if they are at a higher risk than the average American. The first thing that you should know is that audits cost the IRS a lot of time, money and other resources. So the IRS is not scanning lists trying to figure out who they can target. In fact, the IRS actually only audits approximately 1% of taxpayers each year. That is actually a very small number, which means your risk of getting audited is pretty low.
But, of course, audits do happen, and the IRS does use special software to find returns that have red flags or issues that they want to investigate. We have pulled together a list of things that might put you at slightly higher risk for an audit.
The higher your income, the more of a chance you have of being audited. As was mentioned earlier, the overall odds of being audited in 1%. However, if you make more than $200,000, your risk jumps to over 3% and if you happen to be lucky enough to make $1M/year or more, your chances are nearly 10%.
Discrepancies Reporting Your Income
Your employers are legally responsible for submitting your W2s to the IRS and reporting all income. If the IRS receives a W2 from employers reporting income that does not appear on your return, your audit risk automatically goes up.
High Charitable Donations
If you deduct large amounts of charitable donations and this amount is disproportionate to your income, you may attract extra attention from the IRS. Your best bet with all deductions is to keep all back-up documentation.
Home Office Deductions
Because many people can deduct a portion of their rent or mortgage, as well as utilities and insurance, the IRS may take a closer look at those taking home office deductions to be sure that they are legitimate. After all, these deductions are a great deal for many and are sometimes abused.
Running a Cash Business
Small business owners and those who run businesses that receive lots of cash for payment (car washes, bars, hair salons, taxis and restaurants) may be at an increased risk for an audit. Because there is often less of a paper trail for each business transaction, there is more of a chance that income will not be reported.
Audits elicit panic and fear in nearly all of us. Many of us envision the IRS coming to our home or office and demanding to see all documentation immediately. In reality, the audit process is not nearly as intimidating as most people think. The first piece of correspondence related to an audit is usually a letter that outlines what is being requested and how best to proceed. If you follow instructions and respond within the timeframe requested, an audit can even be handled in writing and be off your plate. The best thing you can do to prepare is keep all back-up documentation and be responsive if contacted by the IRS.
If you need help preparing for an audit, consider hiring a reputable tax firm to help. Success Tax Relief has extensive experience working directly with the IRS on behalf of our clients so contact us today to learn more about how we can help you.