Chances of an IRS Audit
The tax code is vague and cumbersome. In fact, an Internal Revenue Service (IRS) investigation in 2002 revealed the IRS Service Center operators gave incorrect information to tax law questions 43% of the time. The IRS even has trouble understanding the tax laws; the chances of getting audited are slim. Most audits are selected at random when the IRS compares tax returns within the same geographic area to see if the returns are generally similar.
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Rate of Audit
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According to Word Wide Web Tax, about 1.5% of all taxpayers are audited per year. Most of the taxpayers who are audited claimed deductions that appeared to be too high when compared to their income level. Also, taxpayers who earn more than $100,000 per year are audited at a higher rate than other income levels.
Do
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Substantiate as much as possible. When you make a donation, record it, ask for receipt, or save the canceled check. Provide this information when the tax return is filed. This answers IRS questions without an auditor having to contact the taxpayer.
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Don't
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Tax experts recommend that round numbers for deductions should be avoided. Organizations that accept donations of goods, such as Goodwill or Salvation Army, provide charts on their websites to help donors estimate the value of their donations.
Red Flags
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Some red flags include claiming tax shelter investment losses, unreported taxable income, self employment, complex investment or business expenses, the taxpayer owns or works in a business that receives cash or tips on a regular basis, the taxpayer's business expenses are large compared to the income earned, a prior audit resulted in a tax deficiency, there are complex tax transactions without explanations, the taxpayer is a shareholder or partner in an audited partnership or corporation, or an informant has given information to the IRS about the taxpayer.
Bottom Line
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Don't be afraid to claim the deductions that can be substantiated out of concern of an audit and claim all income earned. While the chances of audit may linger, it is better to prepare a tax return correctly and accurately, and then leave information off out of fear of an audit.
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References
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
