The good news is, the IRS audits very few taxpayers. Due in part to budget cuts, fewer than 1 percent of filers have been audited in the past three years, according to the Motley Fool, with just 0.86 percent of returns audited in 2014.
The bad news is, there is still a chance, however slim, that the IRS will choose to audit you. While an audit does not always result in a higher tax bill, it makes sense to do what you can to avoid getting audited. So, here are four red flags the IRS looks for when deciding whom to audit:
- Unreported income. The IRS receives copies of all your W2s and 1099s, so if you forget to include some sources of income for the year, the agency will know about it.
- Taking too many deductions. Self-employed people and small business owners are able to take many deductions on their Schedule C. But excessive or questionable deductions are likely to catch the IRS’ eye. So, for a home business, the cost of office equipment and marketing materials are probably okay to deduct, but trying to deduct a bunch of “business lunches” can be risky.
- Large charitable deductions. Tax law encourages generosity by letting taxpayers deduct donations. But deductions that are out of proportion to the taxpayer’s income are suspicious.
- Making too much income. Of course, it is not against the law to make as much (legal) income as you can. But keep in mind that the IRS tends to target its limited resources on filers with higher incomes. Remember when we said before that the IRS audited just 0.86 percent of taxpayers in 2014? For filers reporting an income of at least $200,000, the audit rate was 2.71 percent.
If you ever find yourself facing an IRS audit, remember that it is not the end of the world. An experienced tax attorney can help you get through the audit and achieve a fair result.