With tax season behind us, many are finding unexpected IRS notices in their mailboxes. While seeing the IRS letterhead can cause a spike in anxiety, the good news is that most of these notices are routine. In fact, many are computer-generated, alerting you to unpaid taxes or simple mistakes on your return that can be easily fixed. Just because you’ve received an IRS notice doesn’t necessarily mean you’re facing an audit.
In reality, fewer than 1 percent of individual tax returns are selected for an audit. That’s about a 1-in-160 chance. However, according to the Taxpayer Advocate Service, 6.2 percent of tax returns—or a 1-in-16 chance—are flagged for closer examination. Some of these “audit flags” don’t result in a full audit but may still require extra documentation to clear up.
Given the millions of tax returns filed each year, the chance of facing an IRS tax audit is slim. However, if you’re curious about why your return may have been selected or what raises the likelihood of being audited, here’s a breakdown of the common risk factors involved in the IRS audit process.
❗ These Risk Factors Increase Audit Chances:
1️⃣ You were randomly selected.
The IRS always audits an incredibly tiny sample of tax returns, but the likelihood is still extremely low. But if you are low or middle-income with a relatively simple tax filing situation and wondering why you’ve been audited, you were part of that tiny random selection.
2️⃣ Common audit flags on your return.
Even if you have legitimate deductions, credits, and income substantiation, there are certain lines on your tax return that are rife with errors and fraud across the board. These include the:
Specific tax benefits prone to error and fraud like the Earned Income Tax Credit have their own separate due diligence process. But the above three items are the most common triggers for an audit, even just partial audits, given the vast propensity people have in underestimating these items and not have them properly documented. People tend to overestimate the value of non-cash charitable contributions and frequently lack the substantiation for these deductions. Adoption is an incredibly long and expensive process, and even though it is a legitimate tax benefit in which the adoptive parents will have substantiation, it also equates to a tax credit that can spread out over numerous years and result in paying little or no tax. Because of this, the IRS flags these tax returns frequently.
The home office deduction is another area where people tend to overestimate both eligible expenses and the percentage or square footage of the home being used for the deduction. This deduction can also generate a business loss, resulting in paying little or no taxes. Because of this, the IRS is likely to flag tax returns that have suspiciously large home office deductions.
3️⃣ Someone reported you to the IRS.
The IRS has a whistleblower programthat awards up to 30 percent of the taxes collected and resultant penalties. If your ex-spouse suspects that you fudged your Goodwill donations or that co-worker who doesn’t like you overheard you say, “They never check!” with respect to that side hustle you didn’t report, it’s possible they could’ve anonymously tipped you off to get a quick payday.
4️⃣ You’re a small business owner or freelancer connected to someone being audited.
Even if your client, supplier, or other business associate was not committing tax fraud or malfeasance but simply got audited, people and companies that they paid or received money from are likely to be next. If they didn’t correctly report payments made, the IRS will want to see how the payers’ or recipients’ tax returns also match up.
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