What are your chances of being audited by the IRS?
Only a small percentage of all the individual tax returns filed each year will be audited. The selection process is done largely by computer models. These were designed by looking at millions of tax returns and developing “norms.”
If your tax return has numbers that fall very much outside these norms, your chances of being audited increase. The averages for tax returns have been done by groupings.
Individual returns are divided into groups based on the type of work you do and the level of income you report. Business returns are grouped by the type of business and their geographic location.
Three Main Types of IRS Audits
There are three main types of audits done by the Internal Revenue Service.
1. The simplest is the correspondence audit. You will get a letter from the IRS requesting that additional information be mailed to them.
2. The second level of audit is the office audit. You will be asked to bring certain information to the IRS office for review.
3. The most complete audits are called field audits. They are normally conducted at your place of business.
The Internal Revenue Service is interested in auditing returns which are most likely to produce additional revenue. The Service has developed averages for certain returns which it feels have the best audit potential. Here is a list of some of the items which can draw attention to your tax return:
- High mortgage interest deduction and low income.
- Large noncash charitable contribution deductions.
- Big deductions for business travel and entertainment expenses.
- Large deductions for automobile expenses.
- Business losses several years in a row.
- Low S corporation shareholder salaries in relation to other distributions.
- High damage or theft loss deductions.
- Deductions for “independent contractors” (versus employees) on business returns.
- A major change in your income compared to your prior tax returns.
- Returns which are filed without the necessary supporting tax return schedules.
- Sloppy tax return preparation.
There are different red flags for different industries, professions, and income levels. The IRS is constantly changing what it uses as audit indicators.
If you fail to report income on your tax return which was reported to the IRS on a document (such as an interest statement from your bank) you will receive correspondence from the IRS. You should respond to this letter quickly.
What to Do If You Receive an Audit Notice
If you receive a notice from the IRS, don’t ignore it. You can rest assured that the IRS will not just go away. All contacts by the IRS should be handled promptly. You would be wise to seek professional assistance from the very first correspondence.
If you have questions or want more information on these and other topics, contact our office at (281) 469-6600 or e-mail HooleKramrCPAs@gmail.com.