Each year, the IRS audits over 1 million tax returns. With agency resources shrinking, the IRS is more selective when choosing which tax returns to audit. Knowing what the IRS is looking for can help you understand and reduce your audit risk. Here are five of the biggest reasons the IRS may choose to audit your return:
The reasoning is simple – higher earnings may lead to bigger errors and lower earnings may mean incorrect deductions. The adjusted gross income (AGI) range with the least audit risk is $25,000 to $200,000. As your income moves toward the extremes in either direction, the chance of an audit increases.
The IRS Automated Underreporter Program matches W-2 and 1099 information with the information you report on your tax return. When a mismatch occurs, expect to receive an automated CP2000 notice from the IRS notifying you of the discrepancy and the additional tax amount due.
Rules regarding business deductions are confusing and constantly changing. The IRS knows this. Incorrectly deducting personal expenses or having your business classified as a hobby, thereby eliminating deductions, can get you in trouble with the IRS. Cash heavy businesses are under increased scrutiny due to higher fraud rates. Solid tracking processes and good records are necessary for income and expense substantiation.
The IRS identified over 2.5 million math errors on recent tax returns. The biggest culprits were tax liability and credit calculations. Math errors can create a two-fold problem for you – additional tax owed and more scrutiny applied to other parts of your tax return.
According to a report by the U.S. Treasury Department, 21 to 26 percent EITC payments are paid in error. Numbers that large are sure to get the IRS’s attention. Eligibility confusion and calculation errors are mostly to blame.
While some of the risk factors are out of your control, many can be minimized. If you are chosen for an audit, don't deal with the IRS alone. Click here to schedule an appointment with one of Gold Standard's seasoned tax accountants.
Copyright © Gold Standard Tax & Accounting. All Rights Reserved.