How are people selected for an IRS audit?
It’s mostly based on formulas, computer algorithms. The IRS keeps quiet exactly how they do it, but it’s kind of easy to tell at the same time because there are clear red flags that will pop up.
Higher income will get you flagged. The overall rate is 1 in 119 people get selected for an audit. It’s less than 1 percent of all returns; it’s 0.84 percent. If you make less than $200,000, that goes down to 1 in 132. A lot of those are by mail, so you won’t even be in a room with the IRS. If you make above $200,000, that goes up to 1 in 38. Even more above that, if you make more than $1 million, that’s 1 in 10. It’s more money, more problems.
What other red flags do they look for?
It’s really all about averages. They run averages for specific income brackets. This is what this bracket averages in charitable deductions, averages in business expenses. If you fall outside of those, that will be another red flag.
If you have a business, you also have a higher chance. Businesses have more leeway with expenses. Within that, meals, travel and entertainment on a business return is hot-button. Just think about that, those are easy to say, “Oh, yeah, this is a business expense.” I always tell my clients, if you are doing business at that meeting it is a valid expense, you just need to cover yourself. Write the details down on the receipt: who you met with and what you talked about.
Businesses’ losses in general can be a red flag. Business use of a vehicle and rental units can be another red flag. The more moving parts to your tax return, the more chance.
What should you do if you get audited?
First, call your CPA or get one. You’ll get a letter from the IRS saying this is what we are looking at and this is the deadline. They will list exactly what they are looking for. Usually they want to clarify one or two sections, not the whole thing. Once they look at that, they can always expand the audit.
What’s involved in an audit?
Say they are questioning your mileage deduction for the year. They want to see your mileage logs of what you did. That’s literally it. The burden of proof is on you.
Are audits a bad thing?
It’s never a good thing, but it definitely makes you realize what you need to be doing. The IRS is not out to get you. Their job is to make sure you are following the tax law. There may be situations where they find something in your favor and you get a refund for that.
How long does an audit last?
I just finished one last month with a taxpayer who had a big charitable contribution. That was one of the good ones where you go in and literally say, “Here it is. We have the documentation.” It was closed in an hour. I’ve also been involved in other ones that have drug out for months because they didn’t have their documentation.
Can you avoid an audit?
A red flag can be the home-based business deduction. People ask if they should take it because it can generate an audit. Yes, you absolutely should if it’s a legitimate home-based business. You are entitled. If you do get audited, that’s fine, you can prove the expense. If you’re audited, you’re audited. Just make sure you have your paperwork.
Brittany Hopp is a director with Bohl, House & Samek CPAs. She can be reached at bhopp@bhsadvisors.com.
