What Are the Chances I Will Be Audited by the IRS?

On: October 12, 2018

From the IRS website:

Selection for an audit does not always suggest there’s a problem. The IRS uses several different methods:

• Random selection and computer screening – sometimes returns are selected based solely on a statistical formula. We compare your tax return against “norms” for similar returns. We develop these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts. The IRS uses this program to update return selection information.
• Related examinations – we may select your returns when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.

The following is from an article in Forbes magazine dated March 28, 2016:

• The news late last year that IRS audits of individuals dropped to an 11-year low made for gloomy revenue projections for tax collections. But it also made many taxpayers happy who, understandably, do not want to be audited. Even if you think you’ve reported everything and done it properly, providing receipts is maddening, and often seems dangerous. Taxes are complex, and gray areas abound.
• But your odds of audit are low, and dropping even further. The IRS is auditing only 0.84% of individual taxpayers, less than 1 in 100. An audit might be in person or by correspondence, but there’s a small chance of either. Recently, the IRS Commissioner has suggested that the tax audit picture for the IRS may be gloomier still. And although that is bad for American tax revenue figures, the average taxpayer is relieved.

The following as from a Market/Watch article dated January 29, 2016:

• Audit targets (and non-targets)
• Although the overall audit lottery odds for individual taxpayers are still way in your favor, the chances of an audit are higher for folks with business activities than for whose who earn all their income from wages and/or investments. That said, if you have total positive income above $200,000, you face significantly higher odds of being audited regardless of where your income comes from.
• On the other hand, if you had total positive income of less than $200,000, did not file a business tax schedule (such as Schedule C, E, or F), and did not claim the EITC, your chance of being audited in 2014 was a microscopic 0.3%.

  RED FLAGS

The following is from an article from Small Business.com dated March 25, 2016

1 | Running a small business

That’s not a good thing to read on a website called SmallBusiness.com, but if you run a cash-intensive business (bars, taxis, hair salons) or are self-employed, the IRS will be more likely to scrutinize your return than they do other types of businesses. Also according to Kiplinger, the IRS thinks it can get more bang for its audit buck by examining S corporations, partnerships and limited liability companies.

2 |  Making a lot of money

One in 119 | Overall odds of being audited One in  38 | Odds of being audited if income is $200,000 One in 10 | Odd of being audited if income is $1 million

3 |  Failing to report all taxable income

The IRS gets copies of all 1099s and W2s you receive, so make sure you report all required income on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill.

4 |  Taking higher-than-average deductions

If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don’t be afraid to claim it.

5 |  Reporting large charitable deductions

If your charitable deductions are disproportionately large compared with your income, it raises a red flag. Also, if you don’t get an appraisal for donations of valuable property, or if you fail to file Form 8283 for non-cash donations over $500, you become an even bigger audit target.

6 |  Claiming rental losses

Because of the nuances of the regulations regarding rental losses, the IRS is actively scrutinizing rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business.

7 |  Taking an alimony deduction

The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off don’t satisfy the requirements. It also wants to make sure that both the payer and the recipient properly reported alimony on their respective returns. A mismatch in reporting by ex-spouses will almost certainly trigger an audit.

8 |  Writing off a loss for a hobby

You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit.

9 |  Big deductions for business meals, travel and entertainment

Big deductions for meals, travel and entertainment are always ripe for audit, whether taken on Schedule C by business owners or on Schedule A by employees. Agents are on the lookout for personal meals or claims that don’t satisfy the strict substantiation rules.

10 |  Failing to report a foreign bank account

The IRS is intensely interested in people with money stashed outside the U.S., especially in countries with the reputation of being tax havens, and U.S. authorities have had lots of success getting foreign banks to disclose account information.

11 |  Claiming 100 percent business use of a vehicle

Claiming 100 percent business use of an automobile is red meat for IRS agents. They know that it’s rare for someone to actually use a vehicle 100 percent of the time for business, especially if no other vehicle is available for personal use. The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year.

12 |  Taking an early payout from an IRA or 401(k) account

The IRS wants to be sure that owners of traditional IRAs and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions. Special attention is being given to payouts before age 59½, which, unless an exception applies, are subject to a 10 percent penalty on top of the regular income tax.

13 |  Claiming day-trading losses on Schedule C

To qualify as a trader, you must buy and sell securities frequently and look to make money on short-term swings in prices. And the trading activities must be continuous .This is different from an investor, who profits mainly on long-term appreciation and dividends. Investors hold their securities for longer periods and sell much less often than traders. The IRS knows that many filers who report trading losses or expenses on Schedule C are actually investors.

14 |  Gambling: failing to report winnings or claiming big losses

Recreational gamblers must report winnings as other income on the front page of the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially if the casino or other venue reported the amounts on Form W-2G. Claiming large gambling losses can also be risky.

15 |  Engaging in currency transactions

The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. So if you make large cash purchases or deposits, be prepared for IRS scrutiny.