Many people go their entire lives without being audited by the Internal Revenue Service. And yet, if you are in the one percent group that receives a letter from the IRS, the prospect of facing an IRS tax auditor can be a frightening one.
A recent news article provides Alameda County readers with insight into an IRS tax examination, and a few tips on how to reduce your risk of being audited. One of the first truths to acknowledge is that if the IRS decides to audit your tax return, there generally isn't any debate about whether or not you will be audited. You will.
Statistically speaking, some types of tax returns are audited more frequently. For example, 30 percent of those claiming the earned income tax credit, for low income filers, are audited. Self-employed individuals, whether filing as a partnership, or a Schedule C return, are more likely to be audited. Those with higher incomes are also at a statistically higher risk.
The IRS does not release the formula it uses to determine which returns will be audited. That said, there are certain red flags that seem to indicate a higher risk for a tax audit.
- Large business meal and entertainment deductions
- Claiming home office deductions for a salaried employee
- Excessive business auto expenses
- Losses from anything that could be viewed as a hobby and not a business activity
- Non-cash charitable deductions
The main concept in the article was that filers should attempt, as much as possible, to blend in with the crowd. There are multiple sources available to show the average deductions claimed within a person's income range. Good recordkeeping and honesty will go a long way toward making the audit proceed smoothly.
Keep in mind that if you receive a letter from the IRS requesting an audit, it would be a good idea to only speak to an IRS agent with either your accountant or attorney present.
Source: Yahoo! Finance, "Red flags that tempt the tax auditor," Kay Bell, March 20, 2012