People understandably fear tax audits, but audits actually aren’t that common: Of all the tax returns filed in 2015, the IRS examined just 0.7% the following fiscal year. Nonetheless, we’ve all had “what-are-the-odds” experiences in life. So if you’re worrying about an audit, here are a few things that tend to get the IRS’ attention, according to tax pros.
1. Having a lot of income
In 2016, the IRS audited just 0.41% of tax returns with adjusted gross incomes between $50,000 and $75,000. But it audited about 1% of returns in the $200,000-$500,000 range, almost 5% of returns between $1 million and $5 million, and almost 11% of returns between $5 million and $10 million. Almost one in five people with AGIs of $10 million or more were audited.
“The people with the larger incomes are getting audited at a higher rate because [the IRS’] return on investment is much higher,” says Bill Smith, managing director in the national tax office of financial services and business consulting firm CBIZ MHM in Bethesda, Maryland.
2. Reporting information that doesn’t match up
Those W-2s, 1099s and other tax forms you’ve been getting in the mail? The IRS is getting copies of them, too. So when you prepare your tax return, be sure to report the information on those forms. If it doesn’t match what the IRS already has on hand, the IRS may have some questions for you.
“Matching has proven to be a very, very beneficial way for the Internal Revenue Service to get individuals to comply with the tax law, because they automatically send notices out with a tax calculation and penalties and interest for unreported income,” says Mitchell Freedman, a certified public accountant in Westlake Village, California.
3. Filing a Schedule C
This form is where people often report income and expenses associated with a side hustle, freelancing or small business.
“The self-employed, they’re always a target,” warns Janet Krochman, a CPA in Costa Mesa, California. Small business and freelance income can’t always be traced to a 1099, and the bookkeeping can be questionable, she notes. “It’s sort of a well-known fact that if there is going to be any fudging of expenses or nonreporting of income, it’s going to be on that form,” Krochman says. “If you’re self-employed, you need to treat your business like a business and have good records for everything that’s going on on that Schedule C.”
4. Being a landlord
Income and expenses associated with renting out property can sometimes be red flags, Krochman notes. Landlords who use property-management companies might have better records of how much they earned in rent, but many property owners don’t use such companies. And the outlays for repairs can be an issue, too, she says.
“Lots of people like to buy a property and then fix it up. Well, that is not a problem, but somehow the receipts of your principal residence tend to find their way into your rental income accounting,” Krochman explains. “It’s not necessarily intentional — although sometimes it is — but there’s just a lack of proper accounting.”
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