Some common factors raise IRS red flags for tax audit
The average taxpayer’s chances of being audited this year is about 1 percent. Roughly one out of every 100 taxpayers in Nevada and throughout the country may be called in for a thorough tax audit of their records. Reportedly, however, the agency focuses on the rich and wealthy, so that if you’re not in that group, your chances are even smaller.
For people who make in excess of $1 million, the odds of getting audited rise to about 11 percent of all taxpayers. This year, the agency is struggling with serious budget cuts. The IRS Commissioner has estimated that the 326,000 fewer audits this year will cost the U.S. Treasury at least $2 billion in uncollected taxes.
In this technological age, it’s not surprising that the IRS relies heavily on a software program to tell it who may be a prime candidate for an audit. It is believed by some tax experts that the program looks at average deduction amounts and red-flags returns that are incongruous. One data processing company has published lists of average deductions for taxpayers in different income brackets that may be helpful as a general guide.
Some things that may trigger further suspicion and lead to an audit are: making a higher income than usual, contractor income, home-based businesses and large travel and entertainment deductions. Claiming the earned income tax credit, which is really supposed to be a support for low-income families, may nonetheless be a warning sign to the IRS. Some taxpayers have been caught trying to manipulate the credit to make the payment received much bigger than allowed.
Businessmen submitting a Schedule C business loss are often potential candidates for a tax audit. The agency wants to be sure that it was indeed the economy, and not an effort to trim taxes, that produced the bad business results. Notwithstanding all of that, a taxpayer in Nevada or elsewhere should not be so cautious as to cheat oneself. Experts stress that if the documents are there to back up questionable entries, the entry will be generally allowed by the IRS.
Source: finance.yahoo.com, “Red flags that tempt the tax auditor”, Kay Bell, Feb. 4, 2015