What Will Trigger an IRS Audit?

What are your chances of being audited by the IRS? Not surprisingly, the nation’s tax collector tends to go after the big money.

According to figures recently released by the IRS, approximately 1.11% of all 2010 individual tax returns were audited in 2011, the same as the prior year. This rate has hovered around the 1% mark for several years.

In comparison, the audit rate of 1.02% for taxpayers with income of less than $100,000 almost quadrupled to 3.93% for those with an income of $200,000 or more. That means the IRS audited roughly one out of every 25 of these returns. And the odds of being audited jumped to about one out of eight for those with income above $1 million.

Besides chasing high-income taxpayers, the IRS often flags returns for the following reasons:

  • Unreported income. The IRS will match the W-2s and 1099s it receives with the income reported on your return.
  • Travel and entertainment deductions. Traditionally, this is a prime audit target. IRS agents pay extra attention to deductions for business use of vehicles.
  • Large charitable gifts. It’s suspicious if charitable deductions are disproportionate to the amount of your income.
  • Home-office deductions. Such deductions are often claimed by taxpayers who do some work at home but don’t otherwise qualify for a home office.
  • Rental real estate losses. In general, losses aren’t available unless you “actively participate” in the rental activity.
  • Cash businesses. If you’re usually paid in cash, the IRS is more likely to peruse your return.
  • Hobby losses. Generally, you can’t claim a loss from an activity that’s merely a hobby, not a bona fide business.
  • Foreign bank accounts. The IRS is after taxpayers who don’t report income from offshore accounts.

Conversely, don’t pass up legitimate tax breaks on your return. If you’re uncertain, give us a call for guidance.

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