If you are among the thousands of Americans audited every year by the IRS, you might wonder what the specific reasons are for the audit and what alerted the IRS to audit you.
The IRS computer system determines most of the audits. It compares the details on the tax return that you file with the details it already has from the W-2 and 1099 form. These numbers need to match. If not, you will probably receive an IRS notice for audit. This commences the correspondence audit.
Factors including low or no business profit, low gross profit margin, high travel and entertainment deductions, high use of cars in the business, and high car expenses are also looked into by the computer system. The elements might mark you for an audit.
You might be subject to additional investigation based on:
- Huge amounts of itemized deductions
- Unreported taxable income
- Cash or tips in business
- A record of prior audit and tax deficiency
- Claims of tax shelter investment losses
- Higher than average business expenses for your business
- Big cash figures of charitable donations
- Partner or shareholder in a business
- Complex tax transactions without explanations
Taking all your tax deductions might lead to an audit. If you have not done anything wrong, there is no need to be concerned.
Selection for audit are also conducted through:
- You have been reported to the IRS: Reports can be from an ex-spouse, business associates, former employees, or even a law enforcement agency.
- You were once part of a crime with a big amount of cash involved.
- You have been audited in the past: You’ll have more probability of being audited again.
- You’ve amended a return and claimed a refund: If you have amended a return and claimed a refund on any tax return within 3 years of its due date, you have a relatively high risk of being audited.
- You are a member of a special target group of professions that the IRS deems in need of scrutiny.
- You’re included in the 50,000 taxpayers picked to participate every 3 years in the IRS compliance measurement program.
- You are part of a market segment specialization program: The IRS is clamping down on certain workers.
