The Top IRS Audit Selection Risk Factors

Including certain information on your tax return (or omitting certain information!) may cause the IRS to pay special attention to your tax return-and not in a good way. The IRS knows there are certain areas on a tax return where it is more likely for people to either make errors or to try and misrepresent their income and/or expenses. As a result, the IRS focuses its efforts for auditing on these areas. Below are several of the red flags that can increase the likelihood of having your tax return audited by the IRS. If you have any of the situations described below, the IRS may look closer at your return-if you have a combination of the situations described below, you should review How to Survive an Audit. Filing a Return with No AGI

• A return that is filed with an Adjusted Gross Income of $0 has a higher chance of being audited than returns with income ranging from $1-$200,000. Of the approximate 2.9 million returns that were filed with no Adjusted Gross Income, 2.15% of them were audited by the IRS in 2008. That's higher than the approximate.8% of individuals with an Adjusted Gross Income between $1 and $199,999 who were audited by the IRS.
• The IRS wants to make sure that income is not being left off of the return or that excessive deductions are not being claimed..

Filing a Return with a Schedule C

• If you file a return with a Schedule C, your chances of being audited increase from.4% (the percentage of non-business returns that were audited in 2008) to 2.5% (the average percentage of business returns that were audited in 2008).
• A Schedule C is a popular place for taxpayers to over deduct expenses-along with itemized deductions, as discussed below. The IRS wants to make sure that deductions are legitimate and that income being reported matches a taxpayer's 1099-MISC.

Filing a Return with an Adjusted Gross Income Greater than $200,000

• Once your Adjusted Gross Income is above $200,000, your chances of being audited increase. In 2008:
• 1.92% of returns with Adjusted Gross Income ranging from $200,000 to $499,999 were audited (approximately 59,551 of 3.1 million)
• 2.98% of returns with Adjusted Gross Income ranging from $500,000 to $999,999 were audited (approximately 17,664 of 592,753)
• 4.02% of returns with Adjusted Gross Income ranging from $1,000,000 to $4,999,999 were audited (approximately 12,746 of 317,054)
• 6.47% of returns with Adjusted Gross Income ranging from $5,000,000 to $9,999,999 were audited (approximately 1,784 of 27,570)
• 9.77% of returns with Adjusted Gross Income above $10,000,000 were audited (approximately 1,347 of 13,785)
• Higher Adjusted Gross Incomes are usually a result of income other than wages. The IRS reviews these other income types (such as investment income or business income) with more scrutiny, since it is easier to try and manipulate these numbers than wages.

Claiming the Earned Income Credit

• Taxpayers with an Adjusted Gross Income of less than $200,000 that claim the Earned Income Credit have a 2.75% chance of being audited-compared to a 1.76% chance of being audited if your Adjusted Gross Income was less than $200,000 and you did not claim the Earned Income Credit.
• The Earned Income Credit gives you a tax credit of up to $4,824. The IRS reviews returns that claim the Earned Income Credit to make sure that all qualifications have been met, and that a taxpayer is not erroneously claiming the credit or claiming the credit in order to lower his/her taxes.

Claiming the Home Office Deduction (Form 8829)

• A return with a Schedule C expense for use of the home office is more likely to be selected for audit than a return with a Schedule C without any expenses for the use of the home office.
• This deduction can only be used for EXCLUSIVE business use of your home and the IRS reviews these claims to make sure they are accurate.

Filing a Return with a Schedule E/Form 2106

• A return with either a Schedule E (Supplemental Income or Loss) or Form 2106 (Employee Business Expenses) increases the chance of being audited from.4% (the percent of non-business returns without earned income credit that do not have a Schedule C, E, F, or Form 2106 that are audited) to 1.3% (the percent of non-business returns with a Schedule E or Form 2106 that are audited).
• The IRS reviews these returns closely in order to make sure that taxpayers are reporting all of their income on the Schedule E and to make sure that taxpayers are not purposefully over deducting or incorrectly deducting business expenses on Form 2106.

Filing a Return with Abnormally High Itemized Deductions

• Whether or not your itemized deductions are abnormally high is relative to your Adjusted Gross Income. The higher your Adjusted Gross Income, the higher your itemized deductions could realistically be. A return with an Adjusted Gross Income of $120,000 could claim $20,000 in itemized deductions without raising as much suspicion as a return with an Adjusted Gross Income of $40,000 claiming $20,000 in itemized deductions would.
• As your itemized deductions equal a higher percentage of your Adjusted Gross Income, it is more likely that the IRS may select your return for an audit. The IRS wants to make sure that false expenses are not being claimed in an effort to lower tax liability.