Minimizing Your Audit Risk

An audit can be scary for anybody who has experienced them. In order to avoid an audit it is essential to understand what causes them to occur. This blog serves as an overview of what can cause an audit and how you can prevent one.

2008 IRS Audit Statistics

How often does a business / individual get audited? Here are the stats from 2008.

• Simple Individual Returns - 0.4%
• Individuals with Rental Properties or Unreimbursed Employee Expenses - 1.3%
• Sole Proprietors Earning less Than $25,000 - 1.2%
• Sole Proprietors Earning Between $25,000 and $100,000 - 1.9%
• C-Corporations - 1.0%
• S-Corporations and Partnerships - 0.4%

Why Do Returns Get Audited?

Each return is examined by a computer. The computer uses a program called Discriminant Inventory Function (DIF) System which assigns a score to each individual return that helps assess the likelihood that an audit will lead to a tax change. Details of this scoring system has not been made public by the IRS.

What Causes Red Flags?

While the DIF system scoring remains a secret, there are still known factors that can cause an audit including:

• Incomplete or Illegible Returns
• Mathematical Errors
• Income Other than Basic Wages
• Unusually Large Charitable Donations
• Large Casualty Losses
• Low Income and High Deductions
• Claiming Dependents Other Than Children
• Hobby Losses
• Large Business Meal and Entertainment Deductions
• Excessive Business Auto Usage
• Home Office Deduction

How to Avoid Red Flags

Make sure that you are honest. This might sound like an obvious tip, but it is not uncommon for business and individuals to keep an income source a secret to avoid additional taxes. Make sure you report cash prizes and alimony. Keeping good records is also vital. Remember, the IRS has up to three years ot audit your return so save all of your information. Additionally, use EXACT amounts. Never round off any numbers.