Ever think about your chances of being audited by the Internal Revenue Service? It’s no surprise that the nation’s tax collector tends to go after the big money.
According to figures recently released by the IRS, about 1.11% of all 2010 individual income tax returns were audited in 2011 – the same amount as in the prior year.
In comparison however, the audit rate of 1.02% for taxpayers with income of less than $100,000 almost quadrupled to 3.93% for those with an income of $200,000 or more. That means the IRS audited approximately one out of every 25 of these returns, and that the odds of being audited jumped to about one out of eight for those with income above $1 million.
As well as auditing the returns of high-income taxpayers, the IRS often flags returns for the following reasons:
- Unreported Income. The IRS will match the W-2s and 1099s it receives with the income reported on your return.
- Travel and Entertainment Deductions. Traditionally this is a prime target. IRS agents pay extra attention to deductions for business use of vehicles.
- Large Charitable Gifts. It can look suspicious if your charitable deductions are disproportionate to your income.
- Home Office Deductions. These deductions are frequently claimed by taxpayers who do some work at home but do not otherwise qualify for a home office.
- Rental Real Estate Losses. In general, losses are not available unless you “actively participate” in the rental activity.
- Cash Businesses. If you are usually paid in cash, the IRS is more likely to peruse your return.
- Hobby Losses. Generally speaking, you cannot claim a loss from an activity that is merely a hobby, and not a bona fide business.
- Foreign Bank Accounts. The IRS looks for taxpayers who do not report income from offshore accounts.
Conversely, do not pass legitimate tax breaks on your return. If you are uncertain about whether you qualify, contact your tax professional.