What are the chances your return will be audited?
No one wants his or her federal income tax return to be audited by the Internal Revenue Service (IRS.) Even if the audit results in no additional taxes due, time must be spent responding to the Service’s requests and producing the documentation requested.
When an income tax return is filed in the IRS Service Center, the information on the return is entered into the IRS data processing system. Each return is assigned a numerical score that is arrived at by determining how far above or below the average each of your deductions are for your reported income bracket. The score for each deduction that you have taken that varies from the mean is accumulated and the total amount determines your numerical score. The higher your score, the more likely your return will be audited. About three-quarters of all of the returns audited by the IRS are selected by the computer scoring formula.
These particular items may add to your “red flag” score:
Low gross profit margins for your business
Claiming unreasonable automobile expenses is waving a big red flag.
High auto expenses
High business use of autos
Large umber of autos used in your business
High travel and entertainment expenses
Little or no profit from business operations
High business interest costs
Other high-risk attributes that will trigger an audit are:
Tax shelters. Questionable shelter deductions will interest the IRS. Returns with passive income and losses are almost certain to be scrutinized.
Tax protests. Both the IRS and tax courts are not amused with what they consider frivolous tax protests. If you file a return stating that you owe no tax because the dollar is worthless or make some other such stupid protest, you’ll probably be audited. Claiming an unreasonable number of exemptions on your W-4 will also get the attention of the IRS.
Using a tax preparer on the IRS's "naughty" list will get you coal in your stocking.
Guilt by association. Derogatory reports from informants, a relationship to another taxpayer who has cheated on his taxes, and being a member of a special group that has been singled out for auditing, will get you in trouble. If your return was prepared by someone on the IRS’s problem preparer list, you have a high probability of being audited.
Certain occupations. Taxpayers whose businesses produce cash income, such as taxi drivers and waiters, run a higher risk of being audited. Self-employed individuals, particularly independent contractors, will also merit a special review.
In my experience, the earlier you file your return, the more likely you are to be audited. The IRS claims that when you file your return is not factor in whether or not you will be selected for review. However, at a minimum, your chances of being selected for special “test” programs is increased the earlier you file.