The odds of getting a notification from the Internal Revenue Service (IRS) of a federal tax audit are fairly low. Recent projections estimate most individual tax filers are at about a 0.4% risk. However, certain things can increase this risk. In some cases, the increase can result in a significant jump in the risk of an audit.
What are some red flags that increase the risk of an audit and how can taxpayers avoid them?
The IRS is watching out for certain red flags. The agency has advanced its methods, using software to review tax filings and check for red flags that trigger a closer review. Some of the more common include:
- Unreported income. The IRS is not happy if they think you did not report all of your income. If you get a form from an employer, the IRS probably got a copy, too. As a result, report all income listed on W4s, W2s and 1099s as well as any other tax forms.
- Lots of deductions. The IRS also takes a close look at deductions. If the agency finds that your returns claim a higher amount or number of deductions compared to your peers, your tax returns are likely at an increased risk of an audit.
- Business owners. One of the benefits of owning your own business is the ability to take a number of tax deductions. Do so wisely, and you will not have a problem. However, business owners commonly abuse certain deductions. Examples that have prompted the IRS to take a closer look due to past experience with violations include claiming a vehicle as 100% business use.
The best way to reduce the risk of an audit is report honestly and keep good records. This way, if there is an audit, you should have the evidence you need to defend yourself against allegations of tax evasion.