In 2015, a short-staffed and underfunded IRS audited 1.4 million tax returns. That sounds like a lot until you realize it only represents 0.7 percent of all federal income tax returns filed in 2014. That’s less than 1 in every 100 returns. The percentage is likely to sink even lower in 2016, given the IRS’s budget continues to shrink. Since 2010, the IRS’s budget has been reduced by 17%, despite a 7% increase (9 million) in the number of tax returns filed.
Those are pretty good odds for taxpayers. But less than 1 percent is not zero, and 1.4 million taxpayers are still audited every year. Besides plain bad luck, what factors are likely to increase the chances that you will receive the dreaded IRS audit letter? There are no iron-clad guarantees, but the presence of any of the elements listed below will increase your chances of being audited.
In this article
- 1 Unreported Income
- 2 Too Many Deductions and Credits
- 3 Overly Generous Charity Contributions
- 4 Claiming Rental Losses
- 5 Claiming a Hobby as a Business
- 6 Stashing Money Overseas
- 7 Claiming 100 Percent Business Use of a Vehicle
- 8 Inaccurate Gambling Reporting
- 9 Claiming the Home Office Deduction
- 10 Being Rich
- 11 Filing Sloppy Tax Returns
- 12 Making Way Less than Others in Your Profession
- 13 Discrepancy between Federal and State Tax Returns
- 14 Round Numbers
- 15 Trying to Scam Uncle Sam
The IRS receives copies of Form W-2 for wage earners and Form 1099 for almost all forms of non-wage income, which makes it difficult to get away with underreporting your income. It’s true that legitimate credits and deductions can reduce adjusted gross income, but if there’s too big a mismatch between the figures the IRS receives and what you report on your tax return, be prepared to explain the discrepancy.
Related: Did you know that you could pay off back taxes in installments to the IRS? Find out more about the IRS Offer in Compromise.
Too Many Deductions and Credits
If you make 50,000 dollars per year, and your deductions total 45,000 dollars, don’t be surprised if the IRS has a few questions. This doesn’t mean that you shouldn’t claim every penny to which you’re legitimately entitled. What it does mean is that you should maintain meticulous paperwork to back up your claims because you’ll probably need it.
Overly Generous Charity Contributions
The IRS has a pretty good idea of what most households at your income level claim as charitable deductions. If you claim a lot more than the average, you are likely to generate attention from the IRS. Again, if you have the proper paperwork to back up your claims, especially Form 8283 for noncash deductions valued at more than 500 dollars, no problem. Claim every contribution you’ve made – with no worries.
Related: Find out how to pay off your Tax debt easily. Learn everything about Tax relief.
Claiming Rental Losses
If you actively manage rental properties as a landlord, you can deduct up to 25,000 dollars against your income. This deduction begins to decline as your income exceeds 100,000 dollars and disappears once your income hits 150,000 dollars. Real estate professionals, i.e. individuals who spend more than half their working hours and at least 750 hours annually acting as developers, brokers or landlords, are entitled to even bigger tax breaks. Any losses that bona fide real estate pros incur can be written off without limitation. BUT – be forewarned, the IRS examines the returns of taxpayers who claim to be real estate professionals but who report substantial non-real estate related income on W-2 forms or Schedule C.
Claiming a Hobby as a Business
Do you love taking photos? It’s a wonderful hobby – also an expensive one. But unless you earn a reasonable profit from your picture-taking, you can’t write off your costs as business expenditures. In general, you should report a net profit from your activities in at least 3 out of every 5 years, or at least 2 out of every 7 years, for horse breeders, to legitimately write off any losses as business expenses.
Stashing Money Overseas
Maintaining offshore bank accounts and financial holdings is not illegal. Maintaining foreign financial reserves for the purpose of evading federal income taxes certainly is. Individuals with foreign tax holdings of more than 10,000 dollars must declare their holdings on FinCEN Form 114 by June 30. Taxpayers with larger financial holdings must attach Form 8938 to their federal income tax returns.
Many institutions that formerly operated as tax havens have shifted gears and are sharing intel with the IRS – including the identities of their U.S. account holders. A voluntary amnesty program introduced by the IRS not only allows tax evaders to come clean about foreign stashes but has also proven to be a treasure trove for leads to scofflaws who have not come forward. You’ve been warned.
Claiming 100 Percent Business Use of a Vehicle
If you run a refuse collection agency, chances are your refuse collection trucks are only used for your business. Claiming 100 percent business use for such vehicles is perfectly fine. On the other hand, if you run a package delivery service, and you use your personal automobile for deliveries as well as for general transportation, you are entitled to claim mileage, gas and other expenses only for those trips used to deliver packages. Maintaining accurate logs will keep you on the right side of the IRS.
Inaccurate Gambling Reporting
You’re a professional gambler and lost big last year. Bad luck, indeed, and a legitimate tax deduction – IF you maintain sufficient records to back up your claim. On the other hand, if you score a huge gambling win, don’t even think about trying to deny Uncle Sam his cut, whether you’re a pro or just got lucky with your local lottery.
Claiming the Home Office Deduction
You’re self-employed and you’ve set up a dedicated office in your house or apartment where you conduct business. By all means, claim the home office deduction. The IRS even allows you to use a simplified formula of 5 dollars per square foot, with a maximum deduction of 1,500 dollars. Your home office doesn’t even have to be an entire room – any space that is EXCLUSIVELY devoted to business counts as a legitimate home office deduction. The key word – which trips up many taxpayers – is exclusive.
While the odds for most taxpayers of being audited are very small, taxpayers with incomes over 200,000 dollars had an audit rate of 2 percent in 2015 or one out of every 50 returns. Taxpayers reporting income of more than 1 million dollars had a 1 in 10 chance of being audited. Yes, the IRS profiles rich people. Deal with it. The IRS is just maximizing its limited resources.
Related: Did you know that the IRS could garnish your wages, if you owed back taxes? Find out how you can stop wage garnishment by the IRS.
Filing Sloppy Tax Returns
Computers process most federal income tax returns. But if IRS computers get discombobulated by math errors or omissions, an actual human is called in to sort out the mess. Once that happens, your odds of being audited increase dramatically. Consider using tax preparation software that checks for math errors and omissions.
Making Way Less than Others in Your Profession
If you’re a physician and you only report an annual income of 10,000 dollars, the IRS is bound to take notice. Of course, there’s no need to inflate your income or pay more taxes than you owe. Just be prepared to receive a phone call from the IRS and explain your low income.
Related: Do you owe money in taxes to the IRS? Find out how you can get rid of back taxes.
Discrepancy between Federal and State Tax Returns
Yes, the federal government and state departments of revenue actually communicate with one another. If your reported income differs from between your federal and your state income tax return, the IRS will have questions, and maybe your state will, too. It’s not a situation you want to be in, so use a tax preparation program that checks both state and federal tax returns for errors.
Yes, it’s easier to calculate 500 dollars plus 800 dollars, but chances are those exact figures won’t occur often when you’re preparing your tax return. Too many round numbers raise suspicion that you may be shaving off taxable income. Break out the calculator and include the exact figures when you prepare your return.
Trying to Scam Uncle Sam
It should be a no-brainer, but every year, people deliberately try to cheat on their tax returns. The IRS is hip to a wide variety of fraudulent tax return schemes, so the odds of getting away with tax fraud or tax evasion are not in your favor. Even if you escape prosecution for one year, the statute of limitations for tax evasion is not limited to 10 years. The statute of limitations for tax fraud can extend for decades depending on how the IRS frames the charges. That’s a long time to be looking over your shoulder.
Is tax debt keeping you awake at night? Consider hiring a tax debt relief company to help your resolve your tax debt issues. Tax attorneys can help you negotiate your back taxes with the IRS and possibly get you out of debt. Read SuperMoney’s expert and consumer reviews to find a reputable company that is qualified to deal with your tax problems.
Related: Learn more about IRS Audits – What they mean and your rights before and after an audit.