Although the IRS only audited 1% of tax returns filed in 2013, there are red flags that the IRS looks for. As Fox Business reports, if your return raises one of these flags, your chances of being audited increases. Not all of these red flags should necessarily be changed, but you should be aware that they do increase your chances of an audit.
- Being rich. Or at least significantly richer than most other Americans. 3.26% of last year’s returns reporting income between $200,000 and $1 million were audited, compared with 0.88% of returns reporting under $200,000. That’s down from the 0.94% audit rate in fiscal year 2012. 11% of those reporting over $1 million got a closer look.
- Being outside your category’s norm. The IRS has a computer-scoring system called the Discriminant Information Function, which evaluates tax returns against norms for taxpayers in each of the income brackets. If you’re too far outside your category’s norm based on your deductions, credits and exemptions, the IRS will be alerted to do some double-checking. Some of the deductions that can get you extra scrutiny:
- Higher incomes
- Income other than basic wages–for example, contract payments
- Unreported income, such as investment returns
- Home-based businesses, especially when in addition to salary income, and home office deductions
- Noncash charitable deductions
- Large business meal and entertainment deductions
- Excessive business auto usage
- Losses from an activity that could be viewed as a hobby rather than a business
- Large casualty losses
Don’t be afraid to claim legitimate deductions, though. Scrutiny doesn’t always mean an audit, and it doesn’t always mean you’ll have to pay more. It just means you’d better be confident you were entitled to the deductions. The IRS wants to be sure you didn’t make mistakes, aren’t trying to claim deductions you aren’t eligible for, or aren’t trying to hide income.