It’s a new year and tax season is underway. As taxpayers across the country begin getting ready to file their tax returns, thoughts of most taxpayers’ greatest fear are beginning to creep in: the IRS audit.
While fears over IRS audits tend to be greatly exaggerated, particularly if you are well-organized or entrust your taxes to a skilled professional, it is helpful to understand some of the things that could draw the IRS’s attention. Generally speaking, the IRS only audits around 1% or less of over 146 million individual tax returns. However, these audits are certainly not entirely random. There is no drawing from a hat or special lottery to select who will face an audit. The IRS is paying attention to your return and they are on the lookout for particular factors.
We discussed in a previous blog some mistakes taxpayers make that can lead to audits, which you can read here, but today we will discuss some specific aspects that may draw attention to your return and lead to an audit. These are not mistakes, per se, but factors within your return that receive extra scrutiny when you include them, or fail to include them as the case may be.
Major year-to-year disparity
If you report a major disparity in your income from year to year, particularly if you made a great deal more this year than you did last year, then the IRS will probably take a close look at your return and may elect to audit.
High income earner
Your chances of getting audited increase drastically the more money you make. With an income of $1 million per year you can expect your chances of getting audited to increase to nearly 10%, and over 20% for those who earn over $10 million in a year. We’re not saying you should make less money, just be aware that a higher chance of getting audited comes with the territory.
Self-employment
The IRS understands that those who are self-employed are usually more likely to make mistakes on their tax returns. Unfortunately, this means self-employed individuals are more like to be audited than those who are traditionally employed by a company.
Deducting expensive meals and entertainment
Costs for business meals and entertainment face extra scrutiny from the IRS, especially when they seem very high for the job or industry. The IRS has strict rules regarding meals and entertainment that can be deducted as a business expense, and they want to ensure you are not claiming personal meals and entertainment as business deductions.
100% business use on vehicle
This is a major red flag for IRS audits. Very few people truly use their vehicle for 100% business use, and that number is very likely to trigger an audit.
Taking early payout from retirement account
Are you under the age of 59 and did you withdraw money from a qualifying retirement account like an IRA? There are exceptions, but most of these early withdrawals are subject to a 10% tax penalty, and the IRS will want to make sure you are paying it.
Mismatched alimony reporting
If you and your ex-spouse report different amounts for alimony payments, that is almost certain to trigger an audit. Alimony tax rules are complex and the IRS takes a close look at audits that include alimony payments, whether paid or received.
While it is important to be aware of IRS audits and understand the various factors that receive extra scrutiny and can cause them, you should not fear them. If you are facing an impending IRS audit, do not hesitate to enlist the services of a skilled tax attorney like me to protect your interests and help you handle this potentially serious challenge.
Written by E. Morgan Maxwell
Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.
