As tax season begins, it is helpful to know who the IRS has a tendency to audit. The IRS regularly publishes its “Dirty Dozen” i.e. the 12 most frequent factors that trigger an audit. Most times, your income level, omission to declare income, the types of deductions you claim, your business activities and whether you own foreign assets are the most common triggers for an audit. Although only about 1 out of 100 individual taxpayers get audited each year, to be forewarned is to be prepared, so here are those who the IRS audits.
1. Those who make an inordinate amount of money
If you earn within the top 2% of Americans, the chances of you being audited is greatly higher than the average of 1.1%. 2011 IRS statistics show that the chances of people with annual incomes of $200,000 or higher being audited is 3.93%, or one out of slightly more than every 25 returns filed by this category of taxpayers whereas if you make more than $1 million a year, the chances of you being audited is 1 in 8. On the other hand, for those who make less than $200,000 a year, only 1.02% of the returns filed by them were audited.
2. Those who donate large amounts to charity compared to their income
If the amount of your charitable donations does not commensurate with the amount of income you earn, you will likely be audited because the IRS computers constantly track the average amount of donations for each category of earners. Also, if you do not follow proper procedures when trying to claim tax deductions off your donations, you will likely draw an audit. For example if you claim a deduction from an item donated to charity without a proper appraisal of its value or if you do not file Form 8283 when making a donation of more than $500 you will likely be audited.
All donations must be validated with proper documents such as a valid official receipt or letter of confirmation from the charity stating a description and value of the donation, date the donation was made and name of the charity involved.
3. Those who fail to report all taxable income
Because the IRS has copies of all 1090s and W-2s that you receive, it is easy for the agency to validate your taxable income. So if your tax return does not tally with the documents the IRS has, you will likely be called for an audit. But sometimes mistakes occur. If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.
In my next article, I will share more of who the IRS is likely to audit.