More than 150 million Americans file income tax returns each year. However, only a tiny percentage of filers face an audit in any given year.1 Several different issues may cause a tax return to be flagged for an audit, any of which may trigger a letter from the IRS requesting clarification or proof. Here are four reasons the IRS might flag your federal income tax return or select you for an audit.
You Have Too Many Write-Offs
The IRS has software that automatically flags returns with a high write-off-to-income ratio. For example, someone who writes off 4% of their gross income in credits and deductions is far less likely to receive an audit letter than someone who writes off 60% of their income. There is no specific rule as to what write-off-to-income ratio may trigger an audit. Still, an excessive amount in total deductions or many hard-to-document deductions may raise red flags, such as deductions for a home office or non-cash charitable contributions.
Your Income Does Not Match Your Tax Forms
Both W-2 employers and 1099 issuers are required to provide a copy of your tax forms to the IRS. This double-check means that anyone who files a tax return with a different figure in the income box is likely to have their return automatically flagged—particularly if this discrepancy involves the under-reporting of income.
Generally, it is in a taxpayer's interest to fix any under-reporting of income since Social Security benefits are computed based on the IRS's figures reported to the Social Security Administration. Failing to account for all income earned in a year may impact future disability or retirement benefits.
You Show Too Many Even Round Numbers
It is relatively rare for one's income, deductions, and credits to all end in round numbers like zero or five. If your tax return looks "too clean"—that is, most of the reported figures end in a round number—that might tip off IRS agents that these numbers may be inaccurate. Generally, figures like property taxes, mortgage interest, and investment income probably are not a multiple of $50 or $100. If they legitimately are, be sure to keep documentation so that you may easily prove these numbers if asked.
You're Not Reporting All Your Income
It might be tempting not to disclose non-income payments, like a cash bonus, gambling winnings, or the proceeds from a sale of an item you created. However, failing to report all income is against the law and may put you at far greater risk of an audit. The IRS may request financial records from banks, casinos and other businesses, along with whatever other documentation it deems necessary if it suspects that you are earning income that is not showing on your tax return.
Although you may not always avoid an audit, keeping complete and accurate financial records may provide a defense if you receive a letter from the IRS about an audit.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Neither LPL Financial, nor its registered representatives, offer tax or legal advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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