Are You at Risk of a Tax Audit?

 Now that you have filed your taxes for 2016, you may wonder what your risk is of an audit by the IRS. There are several factors the IRS considers red flags that increase the potential of an audit. The good news is, however, chances are slim you will be chosen. In 2016, only one in 143 returns was audited. And of those selected, about 70 percent were correspondent audits, requiring tax payers only to mail in records to verify specific claims on their returns. Nevertheless, in-depth audits do occur. The most common reasons include:
• High income
• Being self employed
• Unusually high charitable contributions
• Failing to report all taxable income
• Excessive work-related deductions
• Writing off losses on hobbies
• Claiming rental losses
• Reporting an abundance of cash transactions
• Claiming 100 percent use of a vehicle for business
• Obvious lies about income
• Math errors on returns
• Excessive deductions for meals, travel and entertainment
Over the past few years, due to budget cuts, the IRS has shifted their strategy to focus on the highest income earners. Their idea is those who make the most money have the most to hide. Therefore, targeting the wealthy provides the IRS their best return on investment. In 2016, for instance, only one in 196 taxpayers with an adjusted gross income of $75,000 to $99,000 was audited, while one in 161 of those earning between $100,000 and $199,000 was scrutinized. The risk rose considerably for those earning more. For example, audits were conducted on one in 99 of those reporting an adjusted gross of $200,000 to $499,999, one in 49 of earners of $500,000 to $999,999, one in ten of earners of $1,000,000 to $5,000,000, and nearly 19 of 100 of those reporting an adjusted gross of $10,000,000 or more.
Next month we will examine the risk of audit for those self-employed. If you have questions, we welcome you to contact us.
Professional Tax Services is a locally-owned provider serving over 3,500 local residents and businesses. For more information call 661-259-1967 or visit www.scvprotaxservices.com. Through their complimentary EZ2 Thrive program, they provide unlimited free tax planning advice to their clients.