If there's one thing that unites Americans, even amid a highly-contentious presidential election, it's the fear of an audit by the Internal Revenue Service. Realistically, your chances of being audited are very slim and dropping. Fewer than 1 percent of filers were audited for the tax year 2013. With budget cuts, the resources available to conduct audits are becoming scarcer.
Nonetheless, IRS audits collect significant amounts of money. Last year, the IRS collected $57 billion from taxpayers via audits, collections and other "enforcement" actions.
Audits aren't random. The IRS uses something called a Discriminant Function System, which calculates how many questionable issues are in a tax return. There are a number of red flags that make some people more likely to be audited than others. Multiple red flags can bring IRS auditors to your doorstep. These include people who:
-- Are self-employed or do freelance work: Since these taxpayers don't have taxes withheld by their employers, there's more room for fudging income and expenses, whether you intend to or not.
-- Who have high incomes: The percentage of taxpayers audited increases by income. While the overall rate of audit is under 1 percent, as we noted, it increases steadily with income, up to more than 16 percent for people with incomes of over $10 million.
-- Claim large deductions: If you have a large amount of deductions in relation to your income, particularly if they're for non-monetary charitable donations, you can attract IRS attention. It's essential to keep documentation of your donations.
-- Prepare their taxes by hand: Even with all of the software programs out there for preparing taxes, some folks still like to calculate everything themselves. This leaves more room for error, and thus, for audits.
-- Don't report their Affordable Care Act coverage (or non-coverage) accurately: People who purchase insurance through one of the exchanges get a 1095-A form to help them report the subsidy they received. If you don't have the minimum amount of health insurance coverage required by the ACA, you are subject to a penalty.
If you're facing an allegation by the IRS that there was wrongdoing in your tax forms, whether it was intentional or unintentional, it's essential to have guidance from a New York attorney experienced in tax law. The ramifications of actions by the IRS can be significant.
Source: The Fiscal Times, "8 Red Flags That Could Trigger an IRS Tax Audit," Beth Braverman, accessed Oct. 20, 2016