The IRS at times seems like a living, breathing entity that’s often the source of bad dreams and stress. With all their rules, regulations, deadlines and forms, the IRS can be a little daunting, and nothing is scarier than the word audit. Often we are asked what are the chances of being audited, how the IRS chooses people to audit, and if whatever change they make in their life will put them on the radar of the IRS. These are all logical questions and completely reasonable to ask.
Unfortunately, the IRS chooses people at random for auditing, but on the other hand, there are some things that can tip the IRS off into auditing you. We’ve compiled a list of things that can tip off the IRS in no particular order that act as red flags so to speak.
~Not reporting all your income
There are numerous ways to receive income outside of what’s listed on a 1099 or W2. You may receive dividends, pension pay from a previous employer, royalties or whatever it may be. The more sources of income you have, the harder it can be to remember to report all of it or easy to overlook it. Any institution to distribute income will report it to the IRS, so make sure you check and double check that all your income has been recorded.
~Breaking the rules of foreign accounts
Foreign accounts sound like something from high budget espionage film, but some people do in fact have them. The law states that it is required for overseas banks to identify American asset holders and provide that information to the IRS. If you have a foreign account, you must report assets worth at least $50,000.
~Burring lines on business expenses
It’s a great tax advantage to be able to write off business expenses, however, the IRS has gobs of data upon data about typical business expenses. In laymen terms, they know when someone is spending more than what the average is. Tax returns showing 20 percent or more above the normal might get a second look. Therefore, always keep proper documentation of all your business expenses.
~Earning more than $200,000
Higher incomes require more complicated returns that tend to contain audit triggers. The IRS audited 1 percent of those earning $200,000 and almost 4 percent earning more. IF you make more than one million, the chance for an audit increases to 12.5 percent. Again, keeping good paper trails and the proper documentation is a must! This isn’t a bad thing at all, just the nature of the beast in this case.
~Taking large charitable deductions
Just like business deductions, the IRS has gobs of data about typical charitable contributions people at every income level usually make. If someone tries to deduct a contribution that’s largely disproportionate to their income level, eyebrows might raise. When donating, make sure you get the right paperwork for your own records and make sure to file a form 8283 for noncash donations over $500.
~Taking an early payout from an IRA or 401k
Red flags get raised if payments are taken out before 59.5 years of age and you can be subject to a 10 percent penalty on top of regular income tax. There are ways to get around the penalty for things like large medical costs and total and permanent disability, but otherwise, it’s best to not touch the pension plans.
If they see a common mistake popping up, the IRS is liable to look deeper into returns if they think those mistakes were made. There are any number of reasons the IRS may look deeper into someone’s tax return for auditing. The list we provided are not the only reasons, but are common reasons. The IRS still keeps it random, probably just to keep people on their toes, but keep in mind the IRS likes to change a lot. With proper documentation and accurate records, don’t worry about auditing!