When I received a letter from the IRS stating that I was being audited, I immediately wondered: Why Me?
From my research and discussions with IRS staff, the following are circumstances, mistakes, and situations that may trigger an audit:
- People who earn tips – Bar tenders, waitresses, and hair dressers who are paid in cash could be audited. The IRS assumes you may have forgotten to declare your tips as income.
- People who run their own businesses – The logic behind this is that these folks do their own bookkeeping and are likely to make mistakes.
- Unreported income. Duh! You know those little Form 1099s your bank sends you in late January? They send a copy to the IRS, too. Make sure you report all your interest, dividends, and miscellaneous income.
- High medical deductions – People who itemize their taxes and take large deductions for medical expenses are suspicious to the IRS. To claim a large amount of medical deductions means: a) you didn’t understand how to calculate this properly b) you’re fibbing c) you must have been really ill. From my experience, the IRS assumes a or b.
- Taxpayers whose income varies greatly from one year to the next.
- People who file sloppy tax returns – I thought this was an urban legend, but it turns out to be true. Neatness counts with the IRS!
- A tax return that contain a lot of round numbers ($4000 vs. $4000.78) – The IRS believes that in real life, round numbers rarely occur. If you think about this, it makes sense. Case in point: Recently, at the Apple store, my bill totaled $50.00. Both the cashier and I simultaneously uttered, “Wow, that’s weird.”
- The IRS computers are programmed to flag things that are out of the ordinary or that stray too far from statistical norms. If anything on your tax documentation is an outlier, your return will be flagged by the computer and a human (IRS employee) will review your documentation. To be average in the IRS’ eyes is a good thing.
- Generous people who donate their cars to charity – When you donate a vehicle, you’re given a blank receipt and are told to fill in the amount the car is worth. Many people inflate the value of their used vehicles.
- High income earners – If you make more than $100,000 per year, you are twice as likely to be audited. The logic behind this is that if you’re a high earner, the IRS stands a good chance of recovering unpaid taxes.
- Your salary is low compared to others in the same profession – At the end of the tax form is a line where you write your occupation. If you report a salary that is drastically lower than your professional peers, this will raise a red flag.
Up next: How I prepared for my audit.