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Want to Know the Risk Factors of an IRS Audit?

No one wants to be audited! Although you may not be able to avoid an IRS audit there are some factors that will cause the IRS to take a second look at a return. “The IRS sorts returns based on a scoring system, which is secret, but there are some things that will cause them to pay more attention to a particular tax return,” per Janet C. Hagy, president of Hagy & Associates PC, member of the AICPA's IRS practice and procedures committee in a recent article of Investment News.

What are some of those risk factors?

  • Errors in math and tax calculations
  • Omissions – compares the information you report compared with the information supplied by your bank, your employer and others on forms W-2, 1099 and other forms and documents.
  • Clerical errors such as incorrect social security numbers and addresses
  • Large amounts of income not subject to withholding
  • A large number of dependent exemptions claimed in conflict with reported SSNs, tax withholding allowances, etc.
  • Income over $200,000 and even more so if over $1,000,000
  • Schedule C – hobby or business
  • Charitable stock donations
  • Deductions exceeding the amount of income earned
  • Charitable donations of more than $250
  • Home office deductions
  • Small business owners who report a negative gross profit
  • Vacation homes that taxpayers own and sometimes rent out
  • Part-time landlords claiming rental
  • Substantial changes from prior year return

According to Department of Treasury data, the IRS examined slightly less than 1% of all individual tax returns. So the chances that your tax return will be audited are pretty low. An IRS audit, while not on the list of fun things to do, is not something to be feared. If you have kept complete and accurate records of all of your deductions and have reported all of your income, you should be fine. We highly recommend hiring a tax professional to complete your return. I am a CPA (though not practicing as such) and have a tax professional complete mine.