No matter the taxpayer, it seems everyone wonders at one time or another about his or her chances of being subjected to an IRS audit. And while the answer depends on a number of individual factors, the odds, in general, are likely much lower than one might think.
IRS budgets and audit staff have been reduced over the years resulting in diminished audits. As an example, the IRS reported in its 2017 databook that it audited 0.6% of all returns filed in Calendar Year 2016. It is important to note, that figure includes all the different types of IRS audits with a good percentage (roughly 70% in the fiscal year 2017) handled through the mail.
So what are the most common triggers for an IRS audit?
Wealth. 15% of returns audited in 2017 reported income of over $10 million. In general, the more you make, the more likely you are to be audited. In turn, the less you make, the less likely the chance you will be audited.
Offshore Accounts. While it is not illegal to have money stored offshore or overseas, it is illegal to do so in an effort to hide unreported income. An audit is ordered to verify that everything on your income tax return was properly reported.
Tax Protesters. If you are a vocal opponent of paying taxes either via written notice to the IRS or posted on Social Media, it’s likely you may be audited.
Large Charitable Donations. Cash contributions are often red flags. You should make sure to keep all your charitable giving receipts for cash gifts. Non-cash contributions such as buying real estate for conservation may also lead to an audit. Keep in mind, however, that non-cash gifts that come through a partnership are only subject to audit at the partnership level.
Omitting Reported Income. If your numbers don’t match with reported income from your employer, business transactions or other revenue streams, your W2, 1099 or K1 forms can be scrutinized.
Large Home-Based Business Losses / Hobby Losses. Often arising after multiple years of reported losses, the IRS can ask you to prove your activity is motivated by eventual profit, rather than as a hobby. Establishing profit motive usually requires you to show 3 out of 5 consecutive years of profit, or the ability to meet 9 factors pre-determined by the IRS. If you cannot prove profit motive your home-based business could be reclassified as a “hobby” and you would lose your ability to deduct business expenses.
As we mentioned earlier, the more money you make, the more likely you are to be audited. In turn, the less you make, the less likely the chance you will be audited. No matter your level of income, always keep good records to prove your claims in the event of an audit.
In any case, if you have questions or would like to discuss an audit scenario in detail, call Tax Saving Professionals at 772-257-7888 or use our convenient Contact form to schedule an appointment. And remember, "It's your money, We'll help you keep it."