The chances of getting audited are probably higher than ever this year. After all, tax enforcement is one of the few ways the government can collect more…without anyone risking their next election. Now more than ever, it’s important to pay attention to the factors that will increase the likelihood of an audit.
How do the unlucky ones get chosen?
The IRS relies on technology to take the first step in the process of selecting returns for audit. After your return is filed, it goes through a computer check, comparing it to a model. The return receives a Discrimination Information Function (DIF) score. The model, like so many we deal with these days, is closely guarded (think the recipe for Coca Cola or the Google search algorithm). Then seasoned IRS agents review the highest scoring returns, to identify high potential audit candidates.
What makes high potential? It’s simple. As Deep Throat advised Bob Woodward in All the President’s Men, they “follow the money.” If you earn more than $100,000 a year, you’re already five times more likely to be audited – there’s a larger potential return on their time invested!
What would make me more likely to be audited?
For your individual tax return, here are some key factors.
- Your deductions are higher than normal for your reported income
- You give more to charity than most people who earn what you do
- The income on your return doesn’t match the other forms they received, like W-2’s and 1099’s
- Your income is incredibly low, compared to others in your profession
- The numbers look too exact, like you’re guessing – $1,000 in real estate taxes is highly unlikely
- You work in a cash business, like the restaurant or taxi industry
What makes my business more likely to be audited?
The self-employed, like the wealthy, start out with a target on their backs. How can it get worse?
- If you show losses year after year, they may classify your business as a hobby – not deductible.
- If you intermingle business and personal expenses, that’s a big mistake. Using the same bank account to pay for paper for the office copier and that new Prada bag is a big red flag.
- If you try to avoid payroll taxes by hiring everybody as independent contractors, you’ll need to prove it.
- If you treat office equipment like supplies, you’re making a mistake. Suppies (copy paper) are deductible, but business equipment (your new copier) is a capital expense, and must be depreciated. Good news, though – for property placed in service during 2009 there are several ways to write off all or most of these purchases in the first year.
- If you pay yourself too much – or too little! – IRS will notice and take a deeper look.
And of course, there are simple mistakes you’ll want to kick yourself for. If you calculate wrong, forget to sign your forms, forget to include all the documents – you’re likely to get audited
