Who Gets Audited by the IRS?
According to Money magazine in 2007, only 1 percent of all taxpayers are audited each year. The IRS processes most tax returns with computers, and if the computers notice anything unusual statistically, they flag them. IRS employees then review each flagged return and determine whether an audit is necessary.
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Sloppy or Incomplete Returns
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Calculation errors and missing information are the most common reasons for computers to flag returns. A human IRS reviewer then has to find the mistakes, and if any pertinent information is incorrect or missing, he might need to audit the return. The mistakes could be as simple as an incorrect home address or a discrepancy between state and federal returns.
Unreported Income
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Failing to report any income, especially when employers file a 1099 for the income, is practically a guaranteed audit. This includes interest, tips and dividends.
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Suspicious Low Income
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If you report you earn a lower income than others in the same profession and position, the computers will flag the return.
Income without Withholding
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Large amounts of income that are not subject to withholding will be flagged for additional scrutiny.
Drastic Income Changes
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Unexplained, large fluctuations in income usually suggest something was not reported or under-reported, such as a sale of real property or paid side jobs.
Deductions
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Deductions are generally good, but too many will raise red flags even if they are all legitimate. These can include contributing to too many charities, multiple itemized deductions, a large amount of dependency deductions and more deductions than are considered normal for the taxpayer's income level.
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