Five Red Flags that Could Trigger an Audit


red flagWhat can trigger an audit of your income tax returns? There are actually any number of factors, and the IRS isn’t always forthcoming in telling us what they are. But there are at least five that could result in an audit, and you may want to keep these in mind as you prepare your income taxes for this year

High income

This is one you have no control over, although it certainly comes under the category of a good problem. The reason you might face greater audit potential is because you are a high income earner. You can take at least some comfort in that fact!

There is no magic number at which you will automatically face an audit. It’s actually a matter of degree , the higher you are on the income ladder, the greater the likelihood of an audit. For example, a person earning $100,000 per year is much more likely to be audited than someone making $25,000. At $200,000, the likelihood is even greater.

The reason for this is simple: the more that you earn, the greater the possible increased tax liability that can result from an audit. Like every other entity in existence, the IRS will go after the richer sources of revenue most aggressively.

Excessive Deductions

Some people push their deductions  either business or itemized  a little too far. If you earn $100,000, and you declare $80,000 itemized deductions, the IRS will take a closer look at your tax return.

What the are looking for here is inflated deductions. Since it is almost impossible to understate income in a world of computerized reporting, many people opt instead to push the envelope on the deduction side. Since the IRS processes tens of millions of returns each year, they have guidelines on deduction levels based on taxpayer experience. If your deductions exceed the normal range for your income level, and especially if they do by a wide margin, the IRS will flag your return for audit.

Excessive line item deductions

Even if your overall deductions are within the normal range for your income level, the IRS might still flag the return if a single line item deduction is excessive.

For example, let’s say that overall deductions in your income range are about 40% of income, and you fall neatly within that percentage. But you have a single line item  let’s say charitable deductions – that is five times the normal amount for your income range; the IRS may flag that for audit.

Now if you’re going to be audited, this is probably the best one you can face. Since all of your other ratios are in normal range, the IRS may audit for only the single line item. And as long as the deduction is legitimate, you have little fear. They will mostly request supporting documentation for the high line item deduction.

Home office deduction

The home office deduction is a often stated red flag. However, with so many people now working from home, the deduction is more common than ever. It is likely that it will only be an audit flag if  like other types of deductions – it appears to be excessive.

If you are earning $50,000 in gross income for a home business, and writing off $20,000 for a home office, there’s a very good chance an audit. But if it is a more reasonable amount, say $5,000, it will likely be viewed as just another line item.

The key with all deductions is to make sure they pass the reasonableness test. If any deduction numbers look excessive for the income level, the IRS is likely to flag a return for an audit.

Entry and math mistakes on your return

The likelihood of an audit flag for a tax return math error is greatly reduced if you’re using an online tax preparation package or service. You’re entering your numeric information into a human-friendly input screen, and the program automatically transfers and information to the right lines of your tax return.

If you are doing the returns by hand however there is a great possibility of making a math error. The problem with math errors on a tax return is that they carry forward and can affect your total income and your tax liability. If you are doing your return manually, be sure to double and triple check your math. This is especially true as to your income numbers. Since the IRS uses a matching program with W-2s and 1099s sent in by employers, any discrepancies here will invite scrutiny.

Even if you’re using a computer program, there is the possibility of entering information on the wrong line. If you do, it can also cause changes in both your income and in your ultimate tax liability. Before you send your tax return off to the IRS, double and triple check every entry on the return to make sure that they appear on the line that they need to be on.

A little bit of extra care and attention during the preparation of your return can cut down on the likelihood of an IRS audit and save you a lot of trouble and money later.

photo by atoach

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Written by Kevin

With backgrounds in both accounting and the mortgage industry, Kevin Mercadante is professional personal finance blogger, and the owner of OutOfYourRut.com, a website about careers, business ideas, money and more. A committed Christian, he lives in Atlanta with his wife and two teenage kids.

Kevin

With backgrounds in both accounting and the mortgage industry, Kevin Mercadante is professional personal finance blogger, and the owner of OutOfYourRut.com, a website about careers, business ideas, money and more. A committed Christian, he lives in Atlanta with his wife and two teenage kids.

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