There are any number of reasons that people have their tax return audited by the Internal Revenue Service (IRS). In fact, a certain number are picked at random, so really there’s nothing you can do to guarantee you won’t be audited.
But there are certain factors that act as red flags, certain factors that can make a return more likely to be audited. Generally these are factors that the IRS has found to be correlated with underpayment, whether through honest mistakes or intentional dishonesty. Does that mean all returns that fall into these categories are problematic? No, just that in the eyes of the IRS and its computers they’re worthy of a closer look to find out if they are.
Here are some of the factors that make a tax return more likely to receive closer scrutiny:
* General sloppiness.
Names, addresses, social security numbers, signatures, etc. are incorrect or illegible or left blank. Many erasures and cross outs. Calculation errors. If the return looks like it was filled out by an eight year old in a hurry, then there’s a good chance it’s not done correctly and the person didn’t pay the appropriate amount of tax.
* Necessary additional schedules are not included or are not filled out correctly.
Again, an indication the person doesn’t know what they’re doing or didn’t take the process seriously, so a good chance there are errors and the person didn’t pay the appropriate amount of tax.
* Didn’t file a return at all.
Sort of like the way a person who refuses to take a sobriety test is probably doing so because they’d fail it, chances are if a person didn’t bother to file a return it’s because they’d owe money if they had.
* Someone squealed.
Maybe the IRS got an anonymous call or letter that so-and-so has been cheating on their taxes for years by doing such-and-such. Reliable information or maybe just someone with a grudge making trouble? They won’t know without an audit.
* Owners of and workers at primarily cash businesses.
Think tipped employees.
* People convicted of certain cash crimes like drug trafficking.
You’re obligated to pay taxes on income whether that income is obtained legally or illegally. Not surprisingly, the overwhelming majority of people who are convicted of major crimes are not real meticulous about making sure they pay their taxes in full.
* Prior audits found issues.
If you were tested before and “failed,” you’re under a bit more suspicion moving forward.
* Amended returns seeking refunds.
It may be the person made an honest mistake on their original return and overpaid their taxes. But it’s worth taking a little closer look when a person wants a “do over.”
* High income.
The more money a person has coming in, the more games they can play to not pay taxes. Closer scrutiny is needed to see if it’s tax avoidance (legal) or tax evasion (illegal). Plus there’s a greater return on the invested time and effort with rich people. If you go after a person with deep pockets and find they cheated to the tune of $500,000, there’s no way you could have expended that same time investigating enough ordinary folks to turn up a thousand people who cheated by $500 each. As Willie Sutton famously responded when he was asked why he robbed banks, “That’s where the money is.”
* Home office deduction.
It’s legitimate to take certain deductions for money you spend on rent and utilities and such for your home if your home doubles as your workplace. But it’s not legitimate to claim 95% of your expenses for your home are for work and only 5% are for living there, and a lot of people do that.
* High volume of charitable deductions.
It’s no problem – and in fact it’s quite admirable – when people give away a lot of money to charity, as long as they have the documentation proving they did. Let’s find out.
* Suspiciously round numbers.
Did you really have $35,000 in wages last year, make $1,500 in interest income, etc.?
* There are many other areas that the IRS selects on a temporary basis for closer scrutiny, based on reasons to believe there may be more than the usual compliance problems.
In the past these have been as varied as doctors, people working in bars and restaurants in Cleveland, people seeking benefits under the Earned Income Credit (EIC) program, pilots, people whose return was prepared by a certain tax preparer who has been known to take short cuts, and others.
Again, it’s not that people in one or more of these categories are guilty of anything, just that the IRS is “playing the odds” in determining whose returns to look at a little more closely.