What Triggers an Audit?

I suppose it is not surprising that this is the time of year when people most think about the potential of a tax audit.  After all, many like to ignore all thoughts of taxes through much of the year, only letting them rise to the forefront when forced to file a return.

 

It also gets avoided, because it is the most frightening aspect of paying taxes.  Again, no one gets too overjoyed when they see the amount of money they send to the government on an annual basis, but it is even worse when mysterious agents decide to take extra steps in an attempt to gather even more money from you.  This can be especially worrisome, and unexpected, when it comes years after the return in question.  I don’t want to be the bearer of bad news, but as the carrier of a little dose of reality, you may want to take note of this recent Forbes article that speaks of how audits can be started on returns that are up to six years old.

 

The rarity of audits is difficult to determine, for there are so many factors involved, and just what can trigger one is also impossible to nail down.  Regardless of the answers, though, the best way to ease the tension of the possibility of coming under one is to work with a professional tax advisor that you trust (wink, wink, nudge, nudge).  That way, even if you face this situation, you know that your return was correctly handled, and the only thing the audit should result in is inconvenience.

 

Tied in with that are common-sense things that can be done with a tax return that decrease the overall chances of an audit, there is another article from Forbes that tackles the idea from that point of view.  Essentially, it largely comes down to the idea that you should fully be taking advantage of all that you are entitled to, but if you feel like you’re pushing the limits of what is reasonable (or even legal), then it is much more likely someone else looking at that return will agree with that feeling.

 

I would like to highlight one piece, though, about watching out for Forms 1099.  These come in many different varieties, some of which may even surprise you when they arrive in your mailbox.  But know that if you received one, the government knows about it too, so you can’t hide it.

 

I know that a lot of these more vague ideas about what could trigger an audit are not enough for some, and you want to know just what could make one happen, so here is one final article that goes a little more into it, and even has some concrete numbers on the chances of an audit.

 

For those who don’t want to read the whole article, or for those who just prefer to receive news through my golden words, here is a brief summary.

 

  • First, your chances of an audit are higher if you’re self-employed.  This makes sense as the government has less of a chance to track your income throughout the year.  There are also more deductions open to someone in that situation, making more things the IRS may want to check up on.  For purposes of this, self-employed is being defined as filing a Schedule C (sole proprietor or sole member LLC).  If you file as a Corporation (C or S Corp) you have decreased your odds of getting audited because you are really not self-employed but employed by the corporation.

 

  • Second, the IRS knows the value of deductions someone in your financial situation claims on average, so if you’re an outlier claiming much more, they may question it.  Again, this does not mean that you should not claim anything that is a legitimate deduction (let’s say you’re more charitable than most, you deserve the perks that come with those good deeds), but you will want to be able to back up all that you are claiming.

 

  • Finally, those on the extreme ranges of the income spectrum also run higher chances of an audit.  These are further things that look out of the ordinary, after all, so the government may want to know why things look strange.

 

Remember telling the IRS  that these are not “crazy” numbers as expenses or deductions is not a defensible defense during an audit.  Documentation is what counts.  If you cannot document it you should not be claiming it.

 

What you most want is for your return to be legitimate and result in you paying as few taxes as you are allowed, so contact me if you have not already so that we can ensure that is done for your latest return.