The phase “income tax audit” strikes fear into the hearts of most people who reside in the Los Angeles, California, area. There is good reason for this as the process is not only intimidating but can be time consuming as well. Audits that do not go well for the taxpayer will likely result in having to pay additional amounts to the Internal Revenue Service. Those who find themselves in this situation can also expect to pay interest and penalties.
While there is no way to guarantee that an audit will not be conducted, certain things found on a tax return are more likely to prompt an audit, than others.
The first is a deduction that does not correlate to the averages generally seen with the reported income. When the deductions claimed on a tax return are high and the reported income low, it may prompt the IRS to take another look.
The second thing that could increase the risk of an audit occurring is the Discriminate Information Function generated by the IRS’s computer-scoring system. Referred to as DIF, this takes into account the filer’s exemptions, credits and deductions and compares them with what is considered to be “normal” in each tax bracket. Things such as large deductions attributed to business entertainment or meals, large casualty losses and income from things other than basic wages such as contract payments, might cause a tax return to be audited.
The income level of the taxpayer could also make a difference when it comes to being audited. The risk increases for taxpayers with an income over $200,000. In 2013, 3.25 percent of individuals who made between that amount and $1 million in the preceding year were audited. Those who made more than $1 million faced an even greater risk of being audited. Last year 11 percent of the returns filed by individuals in that demographic were audited.
While scary, an audit of a notice does not have to result in the payment of additional fees. Contacting a lawyer who handles tax audits before the IRS agent conducts an interview with the taxpayer could have a great impact on the outcome of the audit.
Source: Bankrate, "Red flags that tempt the tax auditor," Kay Bell, Accessed Aug. 8, 2014