Audit Flags!

07 September 2011 / News / 1 Comment

While 1% of taxpayers are audited every year, a middle-income wager earner with a straightforward return probably doesn’t have to worry.  However, if you have an audit flag on your return, it dramatically increases your chances of being audited.  For that to help you, you will need to know what an audit flag is.

Almost all tax returns are processed by IRS computers. The computers are programmed to watch for anything out of the ordinary, anything that strays too far from statistical norms.  An item that falls outside the norm may be “flagged”, increasing the likelihood that a return will be audited.  A flagged return will be manually reviewed by an IRS employee to determine if there’s an actual need for an audit.  Audit flags don’t guarantee you’ll be audited, but they do mean that the IRS will probably take a closer look at your return.

Here are ten of the most common ways to bring your personal return to the attention of the Internal Revenue Service.

• Incomplete or sloppy returns — Math errors and missing information prompt scrutiny, as you’d expect. If the IRS computer can’t make sense of what you’ve filed, a human has to check to find the mistake. This is one reason to file electronically: computers help to catch these errors before the return is ever sent to the IRS.
• Unreported income —  If you file a return but fail to report income received, you’re heading for trouble. All of your interest, dividends, and miscellaneous income must be reported. Remember: everyone who sends you a 1099 is also sending one to the IRS, and its very easy for the IRS computers to catch this error.
• Suspiciously low income — If you’re making much less than others in the same profession, that raises a flag.
• Having a high income — Though fewer than one-percent of taxpayers are audited each year, those making over $100,000 are five times as likely to come under scrutiny.
• Drastic changes in income — Unexplained fluctuations in income can indicate that something was underreported somewhere. Most people don’t have income that swings wildly up-and-down, and the IRS knows it.
• Round numbers — It’s unlikely that your investment returns were exactly $500, or that your mortgage interest deduction was $10,000.  Too many round numbers on a return are a symptom that something fishy may be going on.
• Too many charitable contributions — Charity is good, but too much charity can raise a red flag.  If the average person in your income bracket donates about $1,000 to charity and you claim you donated $5,000, you’re going to increase the odds of an audit.  Be sure to save your receipts!  Due to recent law changes, no receipt = no deduction!
• Participating in tax scams — The IRS is trained to deal with common evasion attempts.  You should run any tax strategy by your CPA to ensure it passes the smell test!
• High itemized deductions — Again, anything too far from the averages is likely to bring your return to the attention of the IRS.  There’s nothing wrong with claiming all of the deductions to which you are entitled, but be aware that if you have a lot of itemizations, you’re more likely to be audited.
• Disagreements between state and Federal returns — This is another example of how sloppiness can hurt you. Be sure that your information matches on both your state and Federal returns.  Luckily, this item isn't relevant to most Florida taxpayers!

Tags: news