July 30, 2017

Just thinking about an IRS audit can cause anxiety and panic. Thankfully, not everyone has to undergo such scrutiny by the IRS. According to an article on CNBC.com, the total number of individuals audited by the IRS in 2016 declined for the sixth year in a row. Just over one million people—only 0.7 percent—were audited both in person or by mail, resulting in the lowest audit rate since 2003.

Though anyone can be audited, only a very small percentage of all taxpayers actually are. Audits are not random, as the IRS carefully selects which tax returns they will inspect more closely. Multiple red flags can lead to the IRS to audit your tax return. These include:

The very wealthy

The overall percentage of taxpayers audited generally increases by income. If you are making more than $10 million a year, you are at higher risk of being audited compared to other taxpayers. Approximately 16 percent of individuals selected for audits come from the extremely wealthy that make millions of dollars each year.

Those with no income

The IRS becomes suspicious when individuals file taxes but claim that they have no income, particularly if they appear to enjoy a comfortable standard of living. This is especially true for individuals running a business while claiming to have an income of zero due to so many losses. After all, why continue to run your business if you are not making a profit? The IRS may just audit you to double-check that you’re telling the truth.

Self-employed taxpayers

Due to the nature of the job, freelancers or self-employed taxpayers are at higher risk for being audited by the IRS. If you are self-employed, that means that you do not have taxes withheld by your employer. The IRS suspects that you could be deducting personal expenses on your returns by classifying them as business expenses, and will therefore want to take a closer look.

Individuals that claim large deductions

You can attract the attention of the IRS if you claim a large amount of deductions in relation to your income—especially if they are for non-monetary charitable donations. After all, the IRS is familiar with the average charitable donation for individuals within your income level. If you are telling the truth, it’s imperative that you keep proper documentation of all your donations.

People who file returns internationally

Some individuals are under the impression that tax returns are less likely to be examined for problems such as inconsistencies if they are filed from a location other than the U.S. Over the last few years, however, the IRS has scrutinized international returns more closely. If you file your tax returns from another country, know that chances of you being audited will be higher.

Taxpayers who prepare their taxes by hand

Even with so many different programs and applications available for calculating tax returns, some people still prefer to do things the old-fashioned way. Preparing your tax return by hand makes it more susceptible to errors, thus calling them to the attention of the IRS.

These are just some of the types of taxpayers with an increased risk of being audited by the IRS. If you face allegations by the IRS that there was some form of wrongdoing on your tax return, seek guidance from an experienced tax attorney as soon as possible.

Categories: IRS