Taxpayers often fear an IRS audit; however, only about 1.5 percent of all taxpayers are chosen based on a computer analysis to determine which tax returns are likely to be in error. The audits are usually based on income levels and profession along with what the IRS considers abnormal deductions for your income level, erroneous tax items or items on the IRS’ list of hot issues. The IRS audit is the primary method to assure compliance with a voluntary, but legally required filing system.
Taxpayers with higher income and itemized tax deductions on their tax returns exceeding a target range as set by the IRS increase the chance for an IRS audit. In addition, unreported taxable income is a common red flag, which the IRS discovers when its computers match the taxable income you reported on your tax return with the information provided to the IRS from income providers.
Self-employed is targeted for more audits because the IRS believes that this area represents the largest risk of underpayment of taxes. Home office tax deductions and business car use have been targeted by the IRS. Although legal, you must demonstrate a distinct separation between work expenses and personal expenses.
You should take every tax deduction you’re entitled to on your tax return, and you should not be frightened by the potential of an IRS audit. CPAs say the best way to avoid a tax audit is to file a complete and accurate tax return. Double check your math, and make sure you report all income, checking it against last year’s return. Also, make sure you have used the correct IRS forms and IRS tax schedules. If you think the IRS may question a large tax deduction or tax credit, attach an explanation to your tax return when you file it.
Ken Lindow, CPA, MBA, lives and works in Ahwatukee Foothills. Contact him with tax questions or column topic ideas at (480) 940-8351 or Ken@LindowCPA.com.