Getting Audited By the IRS? Don’t Panic.Few things strike fear into a taxpayer’s heart like a letter from the IRS. Fortunately, the odds of you ever being audited by the IRS are lower than ever. Recent budget cuts have reduced the number of IRS auditors, and last year the IRS audited less than one percent of the individual tax returns it received, the lowest level since 2004. However, there are a few red flags that have been known to attract a second look by the IRS that you should know about.
- Unreported income. The IRS matches income sources reported by third parties against your tax return. Any unreported taxable income (such as from an orphaned investment account) can trigger an audit. One of the reasons we recommend keeping all of your accounts in one place is to simplify your life at tax time and avoid simple reporting errors.
- Excessive business expense deductions. The IRS uses extensive databases to track typical travel, meals and entertainment, and other expense categories by occupation. Tax returns that show above-average expense deductions might attract attention from auditors. Mileage is a place where many taxpayers get caught; if you’re not keeping GPS logs, miles traveled, or cost information for every trip, the IRS may disallow your deduction.
- High income. Unfortunately, higher income not only translates into higher taxes, but also special attention by the IRS. In fiscal 2013, the IRS audited 2.5% of returns showing income of $200,000 or more and 10.8% of those with income of at least $1 million.