Whether you’ve attempted to do your own taxes online or have submitted a complex filing due to owning diverse assets, the risk of an Internal Revenue Service (IRS) audit is real for everyone. This may lead you wondering what type information is most apt to get the IRS’ attention.
The amount of individuals or corporations that are audited by the IRS has gone down considerably in the past few years. This is due in large part to the fact that the IRS has lost as much as 30 percent of its enforcement-oriented workforce since 2010. During the 2016 fiscal year, the IRS reported that it audited only 0.6 percent, or 1.2 million, of the total tax returns that were filed that year.
Wealthy taxpayers are, by far the most scrutinized by the IRS. Those who earn income in excess of $10 million have as much as a 20 percent chance of being audited. For the rest of us who earn far less than that, our returns have only a 1 percent chance of raising the IRS’ red flags.
Many filings that ultimately are flagged fail to successfully pass the IRS’ computer-scoring system commonly referred to as Discriminant Information Function (DIF). The criteria that is used by the software to score returns is not public knowledge. However, many tax analysts argue that it looks at one taxpayer’s credits, deductions and exemptions and compares them to others that fall into similar income brackets.
Aside from the disparities DIF may uncover, other factors that may raise the IRS’ suspicions include non-conforming wages, also known as contract payments. Also unreported ones such as tips, bonuses, interest dividends, or other investment returns may get their attention as well.
Those who work at home who claim deductions for home-based business expenses or hold a salary position in addition to running an at-home business can raise red flags. Similarly, individuals that take deductions for sizable non-monetary donations, business-related entertainment, car or food expenses, significant business or casualty loses or earned income tax credit despite not being lower income may also pique the IRS’ interest.
While merely receiving a notice from the IRS that you’re being audited, doesn’t mean that you’re ultimately going to have to pay up, it can be scary nonetheless. If you’re facing an audit, an experienced Danbury, Connecticut, tax law attorney can provide guidance in your legal matter.
Source: Bankrate, “How to avoid an audit by the IRS: These red flags may invite an IRS examination,” Kay Bell, accessed June 30, 2017