15 Reasons Why the IRS Might Decide to Audit You
Don’t fear the tax man. Nearly a quarter of Americans are worried about the possibility of an , a 2017 Rasmussen Poll found. That’s the highest level in 10 years. But most are losing over something that will never happen. Only a tiny fraction will actually have to endure a face-to-face sit-down with an IRS examiner.
Of more than 146 million individual in the United States, fewer than 1%, or about 1.2 million, had their 2015 tax returns audited, according to the IRS. (Budget cuts have reduced the number of audits considerably.) Who are the unlucky victims? Although anyone can be the subject of an audit, certain red flags on your return raise the risk considerably.
“There are no specific deductions that raise a taxpayer’s chances of being audited, but there are actions that raise a red flag and should be avoided,” Dave Du Val, the chief customer advocacy officer for TaxAudit.com, told The Cheat Sheet. “For example, the IRS is always on the lookout for both unreported income and high expenses.”
Accidentally duplicating employee and business expenses or having losses on hobby businesses are other red flags, he said. Avoiding sloppiness when preparing your taxes can reduce the chances the IRS will ask questions about your return.
“Always be careful and accurate when preparing your taxes. And remember that actual receipts and records must be kept to prove eligibility for every deduction or credit,” Du Val said.
What specific red flags does the IRS looks for on tax returns? If any of these 15 situations apply to you, an audit could be in your future.
1. You’re rich
Middle-income are rarely audited, according to IRS data. Of all tax returns filed in 2014, the IRS did not examine over 99% of those with incomes between $25,000 and $200,000. Once your income crosses the $200,000 mark, your audit risk steadily climbs. About 1.5% of who made between $200,000 and $500,000 were audited, along with 8.42% of those earning between $1 million and $5 million. Among the lucky few who earned more than $10 million a year, the IRS audited 35%.
2. You’re very poor (or look it)
The IRS tends to take a closer look at high-income taxpayers, but a return that shows very low or no also raises red flags. When the IRS sees little or no income on a return, it might think you’re hiding some of what you earned. In 2015, 3.78% of returns showing no adjusted gross income were audited, along with 1% of those with income less than $25,000.
3. Your charitable contributions seem really high
“The IRS loves to pounce on people who report high itemized deductions, especially for charitable contributions,” Du Val said. It’s not that the government doesn’t want you to deduct your legitimate charitable donations. But if the amount you claim is very high compared to what others at your level give, it looks like you’re trying to skirt taxes by exaggerating your generosity. For example, the average charitable deduction people who earn between $75,000 and $100,000 claimed is $3,356. If you deduct three or four times that amount, the IRS might demand some proof of your good deeds.
4. Your work-related deductions are excessive
Excessive deductions for employee expenses that weren’t reimbursed are also likely to catch the eye of the IRS, according to Du Val. Certain work-related expenses might be deductible, such as the costs of traveling between two separate workplaces or business meals you paid for yourself. But some people pad their deductions by claiming things they really shouldn’t as work expenses, such as dry cleaning.
“It’s fine to these legally allowable deductions for your actual qualifying expenses, but make sure you have your documentation on hand before you file your tax return,” he said.
5. Your rental property expenses are suspicious
Owning a rental property can be a great way to earn extra income, but for novice landlords, it can also be a tax trap. Confused property owners might claim deductions incorrectly, subjecting themselves to an audit.
“Tax returns with what appear to be inflated rental expenses are frequently caught in the IRS net,” Du Val said. “Some of the deductions on the Schedule E, where the income and expenses for rentals are reported, can be easily misinterpreted. Those who prepare their own tax returns should take the time to understand the deductions they are claiming.”