Reasons for Audits
If you’re among the thousands of Americans audited yearly by the IRS, you might wonder what the specific reasons are for the audit and what alerted the IRS to audit you in the first place.
The IRS computer system determines most of the audits. The information on your 1099 and W-2 forms are compared to the information in the tax return. The numbers must match. If there’s no match, you will receive an IRS notice for audit. This starts the correspondence audit.
Other trends the computer system examines are low gross profit margin, high car expenses, little or no business profit, high travel and entertainment deductions, and too high use of cars in the business. These trends may mark you for an audit.
The IRS may consider further examination with regards to:
- Cash or tips in business
- Claims of tax shelter investment losses
- Large amounts of itemized deductions
- A record of tax deficiency and prior audit
- Big cash figures of charitable donations
- Higher than average business expenses
- Unreported taxable income
- Complex tax transactions with no explanations
- Partner or shareholder in a business
It is essential to note that if you avail of all of your tax deductions, you might be audited. You have no reason to be worried about this, though, if you have not done anything wrong.
Some means of selection for audit are the following:
- You have been reported to the IRS: Reports can be from an ex-spouse, business associates, former employees, or a law enforcement agency.
- You’ve been involved in criminal activity: This is especially true if you have been involved in a crime that included large cash figures.
- You have been audited in the past: You will have a higher chance of being audited again.
- You have amended a return and claimed a refund: If you’ve amended a return and claimed a refund on any tax return within 3 years of its deadline, you have a fairly high risk of being audited.
- You are a member of an IRS special target group: The IRS classifies some professions as in need of scrutiny.
- You are part of the taxpayers compliance measurement program: The IRS selects about 50,000 taxpayers randomly every 3 years for this program.
- You’re part of a market segment specialization program for certain workers.
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